NEW YORK (Dow Jones)--Small stocks may be particularly volatile at the end of the month because this year's restructuring of the Russell 2000 Index is expected to be a rocky one.
Traders, along with money managers that build their portfolios around the members of the small-cap barometer, have been so consumed by concerns about interest rates, Iraq and oil that they have been paying less attention to the Russell restructuring, which occurs on June 25.
This means that the typical spreading-out of trades ahead of the new Russell 2000 taking effect - with the buying of proposed additions and the selling of projected deletions - is not occurring.
As a result there could be a big pile-up of buy and sell orders around the June 25 final rebalancing date, which would cause immense volatility for small-cap shares, analysts say.
Unless investors start acting soon, "chances are you'll see some sort of back-up and a tremendous amount of activity," around the end of this month, said Satya Pradhuman, chief small-cap strategist at Merrill Lynch.
Demonstrating investors' inaction, projected additions to the Russell 2000 are up just 2.4% year-to-date, when historically they jump 15.9% by the end of June, Pradhuman said.
The equity derivatives strategy unit at Credit Suisse First Boston links the lull in trading to events that are slated to occur on June 30 - the Federal Reserve's announcement regarding interest rates and the turnover of Iraq to new governance.
The lack of action has been noticed by Barclays Global Investors, which is the biggest Russell 2000 benchmarker, with over $10 billion tied to the index.
"We are seeing people being more timid about trading," said Patrick O'Connor, a senior portfolio manager at Barclays.
Continued reluctance in making shifts would compound the usual jumpiness that occurs during the Russell reconstitution period. Analysts say there is more than $45 billion linked to Russell 2000 stocks, so even under the best conditions, there is so much trading that a number of problems can result, including difficulty getting accurate prices.
Portfolio managers' positioning typically begins in earnest in late May. That's when the Russell 2000 components are chosen based on their closing prices as of May 28, and hundreds of stocks are involved. An initial Russell 2000 list is issued on June 11, and the final roster comes out on June 25, when the new Russell 2000 goes into effect. The Russell 2000 is made up of the lower strata of the 3,000 biggest stocks by market capitalization.
Russell Investment Group, which owns the index, recognizes that difficulties frequently occur, even under typical conditions, and this year the company is introducing measures that are hoped to help alleviate problems.
Trading of Nasdaq members that are involved in the Russell reconstitution will be done on the Nasdaq's newly introduced "Closing Cross" system that is meant to allow investors to more quickly shift out of the old Russell constituents and into the new ones.
Another step is to publish the final list of Russell 2000 companies at the market's close on Friday, June 25, instead of during the week. The shift should give exchanges and brokers the weekend, instead of just an overnight period, to complete the processing of trades, if necessary, Russell Investment Group says.
- By Karen Talley, Dow Jones Newswires, 201-938-5106; karen.talley@dowjones.com
(END) Dow Jones Newswires
Market Data 
Markets 
AI
