Think about happens if indexes don't pre-announce their changes. Is their market impact larger or smaller than if people know about it and "front-run"?
Suddenly someone wants to trade 10x daily turnover in a small-cap stock right on the closing bell. It could be a dumb whale index fund, or it could be an insider trader who knows about a merger, or a sharp hedge fund who thinks the stock is undervalued.
If you're a liquidity provider or speculator, do you want to stand in front of this freight train at all? If you offset the huge liquidity imbalance, how much will you charge to cover your losses if it was an informed trader? Is it more or less than if you know it's an index fund?
Remember, even if there is some edge in this type of anticipatory trading, competition will reduce its margins significantly. Imagine I announce tomorrow in the Wall Street Journal that I'll buy 100000 off-lease Honda Accords next week from whomever will sell them to me cheapest. Everyone rushes out to buy them on Craigslist or eBay, but only those who make the least on the deal end up selling to me.
Suddenly someone wants to trade 10x daily turnover in a small-cap stock right on the closing bell. It could be a dumb whale index fund, or it could be an insider trader who knows about a merger, or a sharp hedge fund who thinks the stock is undervalued.
If you're a liquidity provider or speculator, do you want to stand in front of this freight train at all? If you offset the huge liquidity imbalance, how much will you charge to cover your losses if it was an informed trader? Is it more or less than if you know it's an index fund?
Pre-announcing generally lets utilitarian traders execute their trades more cheaply: http://rfs.oxfordjournals.org/content/4/3/443.short
Remember, even if there is some edge in this type of anticipatory trading, competition will reduce its margins significantly. Imagine I announce tomorrow in the Wall Street Journal that I'll buy 100000 off-lease Honda Accords next week from whomever will sell them to me cheapest. Everyone rushes out to buy them on Craigslist or eBay, but only those who make the least on the deal end up selling to me.