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Future and derivatives thoughts

  #7 (permalink)

Rome, Italy
Posts: 7 since Jul 2014
Thanks: 3 given, 1 received

josh View Post
Derivative markets (spot euro and 6E, SPY and ES futures, etc.) are arbitraged by computers. Something has to move first, and a whole class of HFT strategies are built around this fact. When one gets just enough out of sync with the other, then buy and sell programs kick in to bring them back in line, capturing a small amount of the spread.

Derivative products actually move one another -- stocks in an ETF move the ETF, but trading in the ETF also effects trading in the underlying stocks. Same with spot currency and futures, though the OTC forex market is obviously much much larger than the futures market.

There are numerous classes of products which must be arb'd to keep things in line, and it happens all the time, every day. The Russell futures must be arb'd with the IWM ETF, which is arb'd with TNA, TZA, and a host of others, which then must be arb'd with 2000 small cap stocks. The speed of computers makes it all work pretty seamlessly.

Thank You Josh now it's all more clear.

My mind focused in speculator operator and small traders and forgot the big picture of this "Market Maker" (or Market Impose lol..). They buy or sell cause the original market rise or fall.

Another question: do you think this operators, computers, softwares, use both market and limit orders?
I though about this, market orders are required, needs some priority to change direction quickly. In the other hands Limit orders tend to stop market absorbing an eventual movement but the same result can be done by a massive execution of market orders in the opposite direction of this eventual movement.

What do you think?

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