"Who Clears the Market when Passive Investors Trade?"

With the help of NotebooksLM, here is a video explainer to the previously shared research paper "Who Clears the Market when Passive Investors Trade?"

Source material:

Michael W. Green

, Marco Sammon, John J. Shim

Who Clears The Market When Passive Investors Trade?

3.57MB ∙ PDF file

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This document analyzes who facilitates market clearing when passive investors, specifically Index Funds, trade in U.S. common stocks between 2002 and 2021. The authors create ten mutually exclusive groups—including Index Funds, Active Funds, Firms (issuance/buybacks), and Short Sellers—to track quarterly changes in stock ownership. Their primary finding is that Firms are the largest contributors to market clearing, particularly when Index Funds are net buyers, often through stock-based compensation rather than traditional buybacks or seasoned equity offerings. The study also employs an instrumental variables approach to establish a causal link between Index Fund demand and Firm responses, suggesting that price impact is a key coordinating mechanism.

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This is a follow up to below post.