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Future and derivatives thoughts
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Future and derivatives thoughts

  #1 (permalink)
Trading Apprentice
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Future and derivatives thoughts

Greetings all,
a basic question without answer hum in my head.

Assuming that:
- Future market is a derivative from another market. Taking for example EUR/USD and 6E, the second follow first.
- For price to advance, all limit orders lying in a certain price have to be filled by market order.

If these sentences are true my question is: how can 6E follow EUR/USD? Buyer and seller have to be synchronized in both markets.

For sure i missing some things.. can you help me to understand this?

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  #2 (permalink)
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  #3 (permalink)
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They are dependent conceptually speaking but independent market flow speaking. So if the distance between them is too small or too large, there is a opportunity to win money buying one and selling the other on what is called żarbitration? (I don't know the exact term in english, this is the closest term from spanish; "arbitraje"). It is a special kind of what is called "spread".

So, by this way, both of them tends to have always the proper distance.

Got that?


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  #4 (permalink)
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Thank You for your answer

Unfortunately i've not got this completely.

The spread between Future and Spot is high at the begin of contract rollover and decrease over time until contract ends.

What I can't understand is the equal behaviour between spot and future, take a look at attached pics: EUR/USD example but it's a general speech between all instrument and their related future counterpart.
On Ninjatrader you have the Future, on Metatrader the spot, you can see clearly the same behavior, same HH, HL, LH, LL at the same time, Future appear more smoothed cause spot have 5 digits.

No behavior difference, the question is: if they are independent market flow speaking, why are so similar?

Just an hypothetical example: blue arrow High zone, if i buy a great quantity of contract to clear 10 levels up current price, so price have to raise 10 ticks, if more people buy more contracts on market side and limits are not enough, price have to rise more.. a different behavior between Spot (falling) and Future(Raising). Of course that's not happen , the problem is why thats never happens? Why there's never divergence between them?

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  #5 (permalink)
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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.

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  #6 (permalink)
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"Back to the future"


Jolly Roger View Post
the question is: if they are independent market flow speaking, why are so similar?

Because they are the same...


They differ only in time (just days or few weeks).

Now?

The derivative, the future, is what market thinks the other (the spot) will be the due date.

Now!

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  #7 (permalink)
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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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