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Micro vs Equities


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Micro vs Equities

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  #1 (permalink)
GreegT
Fernley NV/USA
 
 
Posts: 7 since Nov 2019
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Hello,

I've recently switched to emicro s&p 500 and am having trouble finding info on contract price relationship. For instance, in equities, traders would create bid/ask wall if they have enough capital. Is this possible with emicro contracts or does the price change regardless of whether contracts are bought or sold?

For example with 500 contracts bidding at $3000. Can the price move to 2999.25, without the previous 500 contracts being bought. If yes, do they have to be bought in both emini and micro before the price will move?

Thanks

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  #3 (permalink)
 wldman 
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A few things:

I've never heard of a bid/ask "wall". I was a NASD market maker, and a CBOE market maker and I've never heard of or seen such a tactic...so I'd question ANY information coming from the same source that gave you that idea.

The "price" is defined as last trade, as such it can only change when a trade takes place. The inside market can change with or without a trade taking place.

There is no requirement for stasis or price equilibrium between products, rather the market will keep things very tight as any misprice in one in relation to the other is a classic arb opportunity and would be picked off by any number of algos searching for it.

Also, it is rare to see 500 contracts on the inside in micro S&P 500.

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  #4 (permalink)
 josh 
Georgia, US
 
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GreegT View Post
For example with 500 contracts bidding at $3000. Can the price move to 2999.25, without the previous 500 contracts being bought. If yes, do they have to be bought in both emini and micro before the price will move?

Somewhat echoing what wldman said (cause he's an awesome guy) ..

Let's say the market is 500 bid at 3000.00, 100 offered at 3000.25 -- when a sell market/marketable order hits, it will trade at 3000.00 -- there is no possibility of a transaction occurring at 2999.25, as long as there are bids at 3000.00. Specifically, when a sell market hits the market, the next transaction will occur at the highest bid price.

Regarding MES vs ES, there is no requirement that they move in sync, but as wldman points out, arbitrage ensures that they will, in a sane world. Imagine the ES is also 00 x 00.25, and bids are pulled so that the market is now 99.25 x 99.50 -- if the MES were still 00 x 00.25, then you could buy 1 ES at the market (99.50), sell 10 MES at the market (00), for an immediate profit of $25:

(10 * 3000 * $5 multiplier) - (1 * 2999.50 * $50 multiplier) = $25

That's a huge arb profit for a single ES contract and will never happen but you get the idea. So, it doesn't *have* to happen, but the otherwise free money ensures that they will never be more than a tick or so out of sync, and both being as liquid as they are, they do tend to move almost tick for tick in normal market conditions.

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  #5 (permalink)
GreegT
Fernley NV/USA
 
 
Posts: 7 since Nov 2019
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Thanks for the help!

I thought S&P 500 is just a calculation of the top 500 companies and mini/micros are based off that calculation? Wouldn't the contract price theoretically move with the calculation, instead of trade activity? I realize this is not the case, so my premise must be false.

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  #6 (permalink)
 tr8er 
Europe
 
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GreegT View Post
Thanks for the help!

I thought S&P 500 is just a calculation of the top 500 companies and mini/micros are based off that calculation? Wouldn't the contract price theoretically move with the calculation, instead of trade activity? I realize this is not the case, so my premise must be false.

this product should be the SPY

Why do you think futures are called futures?

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  #7 (permalink)
Andis1994
Stockholmm Sweden
 
 
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Micro and minis have no difference, its a matter of leverage and risk. A beginner should focus on micros- 50$ where as minis are 500$

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  #8 (permalink)
 josh 
Georgia, US
 
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GreegT View Post
Thanks for the help!

I thought S&P 500 is just a calculation of the top 500 companies and mini/micros are based off that calculation? Wouldn't the contract price theoretically move with the calculation, instead of trade activity? I realize this is not the case, so my premise must be false.

There is a rather involved set of factors involved in the calculation of what the price of front month futures should be (dividends, borrowing cost to own component stocks, maybe more). The result is that, based largely on interest rates, futures will be a particular number of handles different from the actual index value when the contract becomes front month. Typically this is in the 5-8 handle range. However, over the next 3 months, the price of the front month futures contract converges with the index so that on the last day of trading, they are roughly equal.

But what happens when S&P futures are down overnight, when the underlying cash index is not being calculated? Well, when markets open, underlying stocks will be priced to match futures. This is a great oversimplification, so please take this with a grain of salt.

Also, imagine that a fund buys several hundred thousand shares of SPY, causing a rise ... while at exactly the same time, another fund who is quite long SPY wants to hedge to lock in a profit by selling ES, so several hundred/thousand contracts are sold short. What will happen? Well, with the two being at odds with one another, they may move opposite directions momentarily, but the microsecond-to-millisecond arbitrage algos will capture this difference quickly and the two will be brought back into line. Yes, again, this is a bit of an extreme example but the point is that derivatives have their own independent supply and demand.

So yes, arbitrage occurs between months of the same contract, different contracts, ETFs (weightings of XLE, XLV, etc., all should equal 100% of SPY, for example), the entire options chain across all these products, ETFs based on options (VXX for example), and of course the underlying themselves (if AAPL is 5% of the index, and AAPL rises 10% due to earnings, ES should rise 0.5% purely from this, for example -- if not, it will be arb'd), plus a lot more.

So, pricing of derivatives and underlyings is definitely a complex bit of machinery!

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