I'm trying to get a better understanding about how indexes are constructed, and there doesn't seem to be a lot of info about the specifics of the S&P 500. Most people know that it's a market cap weighted index, but there's a lot of details about what that means. Some questions: 1. How is the market cap weighted for individual companies? Is it the FMV of the stock or another combination of the bid and ask? Or is it based on the last trade price? 2. What's the relationship between the bid-ask spread of SPY, and the bid ask spread of the underlying shares? It seems like the weighted spreads of the individual shares should eventually result in the spread of the ETF. 3. If trading is halted for a component of the index, how does the index get updated? Without any active trades, it would seem like one of two things would happen. Either a), the last value will be used, despite it not being correct, or b) Index Arbitrageurs would trade the Index ETFs at a price that doesn't match the published index, based on the expectation of movement of the component. 4. As I understand it, the SPX is adjusted for the dividends of the companies. Does this adjustment happen on the ex-dividend date, or the declaration date?
So first of all, it's not pure market cap weighted, but rather free float market cap weighted. The ticking index that you see is calculated based on the last full-lot trade for each stock. The settlement price for the futures or options has a special methodology to it that I am not going to get into. Obviously, that would be the maximum spread possible assuming there are aggressive arbitrageurs watching the market. In real life, SPYs are much tighter than the weighted sum of all spread, as liquidity begets liquidity. The index will get updated based on the last trade. The HFT index arb traders usually do not trade all of the stocks (given that top 50 names explains the bulk of the variance intraday), but overall they are likely to have a model for the underlying stocks that includes halts/corporate action, delistings etc. Delta-1 desks that trade EFP against futures or creates/redeems would usually scale down their trades if any of the major stocks are halted or undergoing some sort of a problem. For the index, divs are adjusted on the ex-dividend date, this way the index is consistent with the underlying basket. The ETFs are a bit more complex and depend on how exactly they treat pending cash and reinvestments.
Is there a data vendor with custom calculations, like midpoint NBBO of underlyings and sub-second updates? If not, is there some standard way to get current weightings / adjustments etc. to do it yourself?
I do not know of data vendors that supply these types of custom live nbbo feeds, but would be interested to know if anyone has found one. The best way to do this is get the index/basket compositions yourself - for the major indices like SPX they rebalance /substantially change infrequently- then if you have live data for each of the 505 lines in the SP you could put this together and have a live mbbo feed yourself that’s even more reliable than a 3rd party vendor feed. Its obviously a heavy load (depending on your technology+resources) but this is how pros do it if they want what you are after in my experience.
First, you have to pay for the weights. They aren't even on the bloomberg terminal, though its possible someone has pirated them. Second, why would need a faster calculation. You can't exploit it. Even half the program trading desks can't exploit this. If its to get a faster calculation of the index, you are better off using the futures.
what? according to https://www.investopedia.com/terms/s/sp500.asp you can calculate the weights without paying them
First: thanks for the response Same Lazy Element! I think this raises another question: what should the sum of all the weights add up to? If the value of every company doubled, the SPX would itself double, but the weights would be the same. The index itself needs to be relative to a baseline. (or alternatively, the weights need to be relative to a baseline). A second followup question: When doing a weighted sum of individual S&P components, there are going to be rounding errors. What does the index do for rounding these values? If there were only two companies in the S&P, with market caps of $8999 and $1001 what should should the weights be in an index that adds up to $10? Since the Share prices are always quoted in cents, and the ETF is quoted in cents, it would appear to force rounding. Rephrasing my question slightly: what prevents rounding errors from compounding on themselves over time? From reading the answers in this thread, it seems like arbs calculate what the S&P index should be, rather than what is actually published. The published index itself seems relevant only at close, when clearing the options and futures and such.