Nasdaq finds SpaceX’s gravitational pull hard to resist

If a cherished guest is coming to stay, it’s not unwise to do some spring cleaning — especially if said guest threatens to stay with a neighbour instead. Seen that way, Nasdaq’s proposed tweak to its index inclusion policies, in time for large listings by companies such as SpaceX, Anthropic and OpenAI, looks rational. For the wider capital markets, it may be less helpful.

Under current rules, if Elon Musk lists his $1.5tn rocketmaker in May, SpaceX wouldn’t make it into the Nasdaq 100 before December. The member list is adjusted just once a year. Until then, the index would be shirking its notional duty of reflecting the biggest companies on the Nasdaq exchange. Should Musk list less than 10 per cent of SpaceX stock, existing free-float rules mean it wouldn’t appear in the index at all.

The proposed solution is to let big companies in after just 15 trading days, and swap the 10 per cent threshold with a sliding scale, among other changes. This would benefit Musk, because index-tracking funds might buy SpaceX sooner and IPO investors would pay more for the shares as a result. It’s good for Nasdaq the bourse, since it makes Musk more likely to go there rather than the New York Stock Exchange. While the index-compiling bit is separate, what’s good for the exchange helps it too.

Nasdaq may say this isn’t pandering to Musk, but merely adjusting to better reflect today’s market reality. It isn’t the only exchange with a well-followed index to do some tinkering: LSEG’s FTSE Russell in January proposed reducing its free-float requirements in a move that will help several foreign IPO candidates win speedy inclusion in UK indices.

But the problem Nasdaq is trying to address isn’t wholly new. SpaceX is big — at $1.5tn it would be equivalent to 4.5 per cent of the Nasdaq 100’s current market capitalisation. But Facebook, which listed in 2012 at $104bn, was at the time equivalent to nearly 4 per cent of the index and dutifully waited without incident until December to join its hallowed ranks.

There are other ways to achieve similar goals. Nasdaq could assess its index members quarterly rather than annually, as the S&P 500 and FTSE 100 do. The counter-argument is that it might introduce too much churn, as smaller companies nip in and dip out. But if the goal is to reflect the market as it really is — which seems the main justification for letting big companies in faster — that would be a feature rather than a bug.

One cost of this is that it may lead over time to an index comprising less seasoned stocks and smaller free floats, and perhaps less polished governance. That, in return, could produce more volatility for investors. Index funds must buy regardless of what’s inside. But their customers, of course, do have a choice. If they don’t like the changes, perhaps they will be less prone to park their money in a tracker and hope for the best.

jennifer.hughes@ft.com__john.foley@ft.com