Taiwan Stock Market's Final Billion-Dollar Trading Revealed: How Index Adjustments Shake the Stock Market

August 26th, Taiwan stocks experienced a sudden surge in trading volume, reaching 122.4 billion yuan in the last 30 minutes, with the total daily turnover hitting 514 billion yuan. Behind this abnormal fluctuation is the effect of the annual adjustment of the MSCI index, the world’s leading index provider. Although the market once plunged below the 10-day moving average during the session, it quickly rebounded supported by major technology stocks, closing up 27.72 points at 24,305.1, fully demonstrating the impact of short-term capital flows on stock prices.

Why Index Rebalancing Triggers Trillion-Scale Trading Volume

As a global leader in index compilation, MSCI ranks alongside FTSE and S&P. Its indices are tracked by over 1,370 global ETFs, with related assets exceeding 15 trillion USD. Therefore, whenever MSCI conducts index rebalancing, the massive passive funds and trackers behind it need to adjust their holdings accordingly, resulting in significant short-term capital movements.

MSCI performs rebalancing four times a year—February, May, August, and November. The May and November adjustments are semi-annual and more substantial, while the February and August are quarterly adjustments. These include changes in constituent stocks, additions, deletions, and weight adjustments, which are implemented after the market close on the effective date. Investors often receive the rebalancing list about a week in advance, preparing for subsequent capital deployment.

Slight Adjustment in Taiwan Stock Weightings in Global Indices

The quarterly index adjustment in August 2025 caused minor changes in Taiwan stocks’ positions within major global indices:

In the MSCI Emerging Markets Index, Taiwan’s weight decreased from 19.45% to 19.40%. Although a small decline, it still reflects a relative position adjustment. Similar changes occurred in the MSCI Asia ex-Japan Index, where Taiwan’s weight dropped from 21.97% to 21.89%. These slight reductions mean passive funds tracking these indices will need to reduce Taiwan stock holdings accordingly, impacting market liquidity.

Constituents Shuffle: Newcomers and Departures

Changes in constituent stocks most vividly reflect real-time rankings of corporate market value and liquidity:

This adjustment added Kang Pei Biotechnology (6919) and Chuan Lake Technology (2059) to the MSCI Taiwan Index, while removing Pou Chen (9904) and RunTai Xin (9945). This structural change in the tracked Taiwan stocks means new constituents will attract index fund buying, while those leaving face passive selling pressure.

In the MSCI Global Small Cap Index, the frequency of changes was even higher, with 7 stocks added and 4 removed, including Kang Pei Biotechnology (6919) and China Paper Pulp (1905). Notably, Kang Pei appears in multiple indices—first removed from the global small cap index, then added to the Taiwan index—indicating its market value and liquidity have reached the upgrade threshold.

The composition of the MSCI Taiwan Index closely overlaps with Taiwan market cap-weighted ETFs like Yuanta Taiwan 50 (0050), so the impact of these adjustments on Taiwan stocks should not be underestimated.

The Capital Mechanism Behind the Last-Minute Surge

Why does the closing period (from 13:25 to 13:30) on rebalancing days always see intense volatility and abnormal trading volume? This involves two main mechanisms:

Concentrated Rebalancing by Passive Funds

Global ETFs and funds tracking MSCI indices are enormous in scale and must complete their holdings adjustments before market close to align with new weights. This results in a surge of concentrated buy and sell orders in the last five minutes. Newly added stocks typically see large buying, while stocks being removed face concentrated selling.

Orderly Entry and Exit of Arbitrage Capital

Some funds familiar with the index adjustment cycle have pre-positioned in advance, placing expected buy/sell orders before the effective date. When the moment arrives, these funds close their positions en masse, further boosting trading volume. Historical data shows that stocks in the index often experience intraday price swings exceeding 3%, creating rapid short-term volatility.

Investors should be cautious, as the next-day opening often witnesses profit-taking and reversal effects, driven by overnight overseas capital adjustments and local investors locking in gains.

Investment Advice and Risk Warning

The short-term volatility caused by MSCI index rebalancing is a double-edged sword. On one hand, the adjustments reflect changes in companies’ fundamentals, market capitalization, and liquidity rankings. On the other hand, the volatility during closing and the following day often surpasses fundamental factors and is mainly driven by capital flows.

Investors should be alert to the short-term risks on rebalancing days, avoiding blindly chasing highs or panicking during declines. Long-term investors can use these fluctuations for strategic positioning, while short-term traders must strictly control risk exposure. Understanding the mechanisms and impacts of index rebalancing is essential to maintain rational judgment amid market volatility.