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Will large trades in ES impact SPY and composite stocks?
Hello,
I new to trading stock index futures, and the concept is a little abstract to me.
I can't understand why the EMINI future instrument is correlated almost to the tick to the SPY, or even the MICRO or regular version of the future.
Let's take the purely hypothetical example of me having to sell 10 000 contracts of the EMINI ES.
I put them on the ASK at let's say 2800 as iceberg order. When the price reaches this level, it will obviously have a hard time passing this level and stall.
If the EMINI is stalling there, will the MICRO and regular future contract be impacted and stall as well? And what about the SPY and stocks composing it?
If it is the case, by what magic, can a trade in an instrument, affect another version of it or the regular index, or even the stocks composing it?
As with any very similar financial instruments, price is kept very closely in line through arbitrage. That is, if the price of the same or a very similar asset gets even slightly higher or lower in one market compared to another, traders who make it their business to take advantage of price discrepancies will buy in one market and sell in the other, and any price difference is quickly eliminated. The amount of buying or selling power that can and will be brought to bear, very quickly, is close to limitless and will overcome any temporary difference, no matter the cause, and no matter what the size of the trading that caused the initial difference.
Bob,
I can see how the SPY can influence derivated products. But does it work the other way around? Can the derivate products such as ES influence the index?
Say a very large sell order blocks the price on the ES. Since the SPY can't be traded directly, does it mean the arbitrage players to bring the SPY and ES in sync will short heavily all stocks in SPY and buy the ES to bring them in sync?
Or will they just leave the SPY and its stocks alone, and massively buy the ES only to bring it in sync by taking out the large blocking sell order?
You have to think about how much the big hedge funds are running. AQR has 80 billion, Renaissance has 50.There are thousands of other hedge funds also with millions to run. You can't think in terms of just "arbitrage players" doing one thing. Who knows how many strategies are actually going on at any given moment with so much capital being traded.
That is why it flows both ways and in all ways. There is no part of markets that are not connected with information flows going both ways.
First off, these are not independent markets that somehow influence each other at a distance by some mysterious means. They are intimately connected.
The entire purpose of stock index index futures is to allow large holders of stocks to hedge their exposure by taking the opposite position in the futures market -- for example, if they are long a portfolio of stocks that resemble the S&P Index somewhat, they may sell short the index futures as insurance against a loss in their stocks. The variations are many, but the point is that the connections between stocks and the futures are always very close, and it is in the interest of the large players in both markets for this to be so.
As to what would happen if futures and the S&P differed at any one point, they might buy ES and sell a basket of stocks, or vice versa. Who knows? It's not which is "influencing" the other, the index futures market and the stock market have many of the same players, who are using both the stock and the index futures markets as part of their business strategy.
By the way, just for clarity, SPY is not the S&P 500 Stock Index -- the index cannot be traded, as you said, but SPY can. SPY is an ETF (Exchange Traded Fund -- a mutual fund that is traded on the stock exchange as if it were a stock. (
See: https://en.wikipedia.org/wiki/SPDR_S%26P_500_Trust_ETF ) It owns positions in the S&P 500 stocks and it is intended to track the index. Market forces will keep SPY in reasonable step with the S&P Index, as they will anything else that is tied to the index.
I hope all this is helping. I think it would be a good idea for you to dig a little deeper into how the index futures markets operate, and their relationship with the stock markets. It's not a small subject.
