Market Microstructure Lab • Economist Series

Index Tipping Point: Price Discovery Simulator

Fund Allocation Architecture
10% Active Heavy 50% Milestone 90% Passive Index
Historical & Crisis Scenarios
Inject Stock Shocks
Grossman-Stiglitz Paradox: If markets are fully informationally efficient because everyone indexes, nobody has an incentive to collect costly fundamental data. Thus, extreme indexing guarantees severe mispricing.
Basket Equities: True Value (Dashed) vs Index Market Price (Solid)
Market Price
Intrinsic Value
Live Microstructure Order Feed
Market Telemetry & Feedback
Price Discovery Index 78.4
Mispricing Spread 3.8%
Active Alpha Margin -0.62%
Intra-Index Correlation 41.2%
Performance & Fee Drag
Passive Index Fee: 5 bps (0.05%)
Active Manager Fee: 75 bps (0.75%)
Gross Active Alpha: +0.13%
Net Alpha after Fees: -0.62%
Systemic Health Status
Equilibrium Tipping Zone (52% Passive)

Passive flows mechanically buy entire baskets regardless of company earnings. Active managers suffer fee erosion while dampening mispricings.

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