Prepare to face the Mother of all FTSE re-jigs

The next FTSE index constituents review is on 10 December, using share prices at the close of the previous day. Based on current market caps there would be half a dozen changes amongst the blue-chips, with another 20 or so each for the midcap 250 and smallcap indices.

But that’s not the end of it. FTSE is also tightening up its market liquidity rules, with the intention of kicking the untradeables out of the All-Share.

David McCraw, Manager of AAM’s Edinburgh UK Tracker Trust, says this risks a “further marginalisation of small cap stocks”.

Based on our estimates the constituents of the FTSE All-Share Index could fall to around 600 (currently in excess of 660) with a resulting 250 constituents in the small-cap segment.

Ten years ago, the FTSE All-Share contained nearly 900 constituents with around 550 constituents in the small-cap segment. Reflecting high levels of take-over activity, management buy-outs and transfers to AIM, the weight of small companies in the FTSE All-Share has fallen in the past ten years from five per cent to just above two per cent today.

The new liquidity rules are intended to squash lumpy markets. Rather than using monthly trading volumes, the calculations are to be based on the median daily trading volumes per month.

Here’s how it’ll work: previously, constituent companies needed to trade just 0.5 per cent of their free float in eight of the 12 months prior to the annual review. Would-be entrants had to pass the same test in at least 10 months.

Now, existing constituents need to trade at least 0.015 per cent of its shares in issue for more than four of the 12 months prior to the review. Any stock failing that test will be kicked out of the All Share, and barred from inclusion until the next annual review.

Potential FTSE All Share entrants face a harder time as well. They will require a median daily trade per month greater than 0.025 per cent of their shares in issue in at least 10 of the 12 months prior to the review. Companies will, however, have the right to appeal based on market conditions or the accuracy of FTSE’s data.

While the jostling for position has already started in the run-up to the Motherjig, it’s anyone’s guess what bizarreness this one is going to chuck up over the next few days. And, given we’re dealing with barely traded stocks in the first place, things could get more than a bit lively.

You have been warned.

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