take a lot of people owning index funds and somehow fleece them
There are strategies to do this now, but they're hard to execute. One example is to target stocks that are likely to enter or drop off indicies. Index funds will be looking to buy or sell them soon.
Mostly these strategies depend on your ability to set up a very high speed link to the computers that clear trades and interpret the algorithms that index funds use to establish their samples of the market. If you can get in just ahead of the index funds and their monster volume, you can shave a few tenths of pennies from the investors.
You can make millions with those strategies but it's a drop in the index fund bucket. Quite a lot of "quant" trading activity is about ripping off ordinary people by unnoticed fractions by getting in ahead of them. Much more innocuous than the large scale bribery and fraud that makes up so much of the financial industry.
This was covered in a WSJ article yesterday.
http://online.wsj.com/article/SB1000142405274870400870457563...
"Over the long run, sharp traders getting out in front of these forced portfolio changes have poached at least 0.38 percentage point of annual return away from Russell 2000 index funds, estimates a new study in the Journal of Empirical Finance."
Not all index methodologies are created equal, the way that Russell handles periodic reconstitution is particularly susceptible to front running. Other indexing methods are not as bad.
Another idea is to make things so confusing that the customer is no longer sure what they're getting. Just name a managed fund something confusing that makes it seem like an index fund (but still include all the fees like a managed fund).
There are strategies to do this now, but they're hard to execute. One example is to target stocks that are likely to enter or drop off indicies. Index funds will be looking to buy or sell them soon.
Mostly these strategies depend on your ability to set up a very high speed link to the computers that clear trades and interpret the algorithms that index funds use to establish their samples of the market. If you can get in just ahead of the index funds and their monster volume, you can shave a few tenths of pennies from the investors.
You can make millions with those strategies but it's a drop in the index fund bucket. Quite a lot of "quant" trading activity is about ripping off ordinary people by unnoticed fractions by getting in ahead of them. Much more innocuous than the large scale bribery and fraud that makes up so much of the financial industry.