The third Friday in September is a special day in the financial-market calendar. It’s one of the four days a year the S&P 500 index gets rebalanced. With over $10 trillion of assets passively tracking it, the exercise will affect markets and investors in every corner of the world.
Yet unlike other indexes, the S&P 500 isn’t governed by hard rules. While most benchmarks follow mechanical formulas – automatically adding companies that hit market-capitalization thresholds or liquidity criteria – the S&P 500 relies on human judgment. A small committee at S&P Dow Jones Indices makes the final call on every addition and deletion. (Bloomberg LP competes with S&P Global in providing indexes, including the the Bloomberg 500.)
Last week, the committee intervened to keep Strategy Inc., the enterprise-software firm turned Bitcoin treasury company, on the sidelines. Despite meeting all technical criteria – a market cap above the $22.7 billion published threshold, positive earnings (thanks to a $14 billion unrealized gain last quarter) and the highest float-adjusted liquidity ratio among potential candidates – the committee passed it over. Instead, it announced that AppLovin Corp., Robinhood Markets Inc. and Emcor Group Inc. will replace MarketAxess Holdings Inc., Caesars Entertainment Inc. and Enphase Energy Inc.
Michael Saylor, Strategy’s chairman and architect of its Bitcoin pivot, offered a wry response. “Thinking about the S&P right now…” he posted on X, highlighting a chart that showed Strategy’s long-term share price outperformance relative to the index. Inclusion would have forced passive funds tracking the benchmark to buy nearly 50 million shares, worth around $16 billion at current prices, according to an analysis by Stephens Inc. Instead, Strategy stock sagged 2% in the trading session following the announcement, while Robinhood’s rose 16%.
It’s not the first time the committee has upended expectations. In September 2020, it snubbed Tesla Inc., sending the stock down 21%. The carmaker eventually made it into the index three months later but not before the committee’s former chair, David Blitzer, fielded calls from multiple people asking what was going on. By the time it was granted entry, Tesla became one of the benchmark’s largest constituents.
Despite its importance, not much is known about the committee. S&P Global reveals that it is made up of “full-time professional members of S&P Dow Jones Indices’ staff” who meet monthly, likely at the firm’s Water Street office in downtown Manhattan. It is overseen by Dennis Lee, global head of index governance, but the identities of individual members are closely guarded. The secrecy is deliberate, a lesson learned from experience. In the late 1990s, Forbes magazine published a picture of the group in an ornate wood-paneled room. "The day that story ran, everybody on the committee got identical FedEx packages from various companies that wanted in," recalls Blitzer. So sensitive are their discussions that not even minutes are released.
The rare exception came in 2020, when one member’s identity emerged through his own misdemeanor. Yinghang “James” Yang, a senior index manager on the committee, was prosecuted for insider trading after conspiring with a friend to purchase options ahead of index announcements. Between June and October 2019, they generated more than $900,000 in illegal profits by trading hours before companies were publicly announced as additions or removals. The case underscored why committee discussions remain strictly confidential – the information is highly price-sensitive, capable of moving billions in assets with a single decision.
For all the criticism it attracts, the committee model has proven remarkably effective. David Blitzer, who chaired the committee for 24 years from 1995 to 2019, defended the hybrid approach. “If the only requirements for maintaining an index were getting the numbers right each day, a fixed rule book would suffice,” he argued. “But when the market doesn’t play by the rules, a rigid rule book won’t work.”
That insight extends far beyond finance. As algorithms increasingly govern decisions across domains, the S&P 500’s model offers a compelling template. Pure rules create predictability but struggle with edge cases and unforeseen circumstances. Human oversight provides the flexibility to make judgment calls when reality doesn’t fit the formula. The committee’s power to intervene – whether keeping Strategy out or eventually letting Tesla in – suggests a path forward: algorithms as the foundation, humans as the ultimate arbiters.
A message from Advisor Perspectives and VettaFi: Stay ahead of market changes with our daily updates on key market and economic indicators. Visit the AP Charts and Analysis site for our expert insights.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Marc Rubinstein
