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ES/MES Price correlation question


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ES/MES Price correlation question

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  #1 (permalink)
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How is it that the E-mini S&P and the Micro E-mini S&P are almost exactly the same price all the time? It doesn't make sense how that could be possible based on different volume/liquidity and the types of people (skill level) that might be trading the MES compared to the ES.

What am I missing?

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da11 View Post
How is it that the E-mini S&P and the Micro E-mini S&P are almost exactly the same price all the time? It doesn't make sense how that could be possible based on different volume/liquidity and the types of people (skill level) that might be trading the MES compared to the ES.

What am I missing?

to make it easy: same underlying = same price

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  #3 (permalink)
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da11 View Post
What am I missing?

Arbitrage.
As tr8er said, they are the same instrument, just available in large or small units. So if one is higher it can be sold, and the lower one bought with the expectation of them coming back in to line again and the position flattened.
As the markets are both priced online in real time and can therefore be monitored print by print by any firms computers looking for discrepancies in price to exploit, prices stay in line.

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da11 View Post
How is it that the E-mini S&P and the Micro E-mini S&P are almost exactly the same price all the time? It doesn't make sense how that could be possible based on different volume/liquidity and the types of people (skill level) that might be trading the MES compared to the ES.

What am I missing?


matthew28 View Post
Arbitrage.
As tr8er said, they are the same instrument, just available in large or small units. So if one is higher it can be sold, and the lower one bought with the expectation of them coming back in to line again and the position flattened.
As the markets are both priced online in real time and can therefore be monitored print by print by any firms computers looking for discrepancies in price to exploit, prices stay in line.

To agree with @matthew28 and fold it into your point about the different traders and about the volume of trading of the two instruments, some of that trading, and it can be a very large amount if an exploitable price difference is perceived to happen, will be pure arbitrage trading. This kind of arbitrage -- buy one, sell the other -- is essentially risk-free if traders can move fast enough to still be able to profitably execute it before the arbitrage activity can erase the differences. This means there is more than enough money poised at any time to execute almost instantly.

Arbitrage will not move price if there is no price difference to exploit (there is no profit to it then so it won't happen), but there is more than enough buying/selling power out there if there is. The effect of arbitrage is to boost up the lagging instrument through buying and push down the higher one through selling. It will be quick, and small amounts per contract will be taken as profits, but these are large enough players for it to be worthwhile for them.

This kind of thing happens in any market situation where there are two very similar instruments in different markets, and where there might be a price difference between them. The price difference occurs because there are in fact different sets of traders in the two markets, who act independently. The arbitrage occurs because the arbs act in both markets to take advantage of what the other traders have done.

It is also what keeps the ES futures contract closely in step with the basket of stocks that make up the S&P stock index, for example. Same principle: buy or sell the ES, and at the same time sell or buy (whatever the opposite action would be) a wide-enough and large-enough basket of stocks. Lots of arbs jumping in at the same time keeps ES and the S&P in step too.

Bob.

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  #5 (permalink)
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Thanks for the time you all took to answer my question. I should have known that haha. Makes complete sense now.

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Does raise the question, does order flow trading working on MES when it's just being arbed vs ES?
Does order flow trading work on currency futures when they are just be arbed vs the Forex market.

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SMCJB View Post
Does raise the question, does order flow trading working on MES when it's just being arbed vs ES?
Does order flow trading work on currency futures when they are just be arbed vs the Forex market.

I don't do order flow (and don't claim to understand it either), but I assume the answer is yes. The reason is that arb orders are orders. They show on any tool or analysis that follows orders -- they would have to. Also, arbs may be in the market at any point, sometimes more strongly than other times. So if order flow trading works at all, and I assume it does, then I also assume that it works when arbs are in the market too. I would need to understand why it wouldn't, actually. What would make arb buying/selling different? (Other than perhaps being large and really short-term. But there is a lot of really large short-term trading in the markets too.)

After all, if they are buying MES and selling ES, then their buys will push up MES, just as non-arb buys would, and their sells will push down ES, just as any sells would, or would tend to, anyway. An MES trader would see one set of orders, an ES trader would see another, and each would, I hope, respond appropriately. Probably once the arbs are done, there would be no follow-through, as in a trend change or something, but isn't that the same with any fast, in and out trading?

In other words, I assume that the effect of arb orders are not any different from any others, except perhaps their size and how long the arbs hold onto their positions.... but I think this would also just be part of the ebb and flow of the orders.

Again, I don't do any order flow trading or understand much about it aside from a very general sense, and so I don't really know what I am talking about (not unique on the internet, but at least I'm saying so. ) Still, if you're just trading price on a bar chart, the effect of arb activity will look the same as any other buying/selling too. So if it doesn't mess up price trading, would it mess up any other kind?

This is just my guess on an interesting question. I'm sure there are people who know more.

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For reference if we look at Friday MES traded 773k lots, which on a 10:1 ratio is equivalent to 77k ES lots. ES on the other hand traded 1.18M lots. Hence MES volume was equivalent to 6.5% of ES volume. When we consider that a large percentage of that was probably Arbitrage volume, the real market effecting volume was considerably lower.

To confirm when I mentioned order flow, I meant people who trade based upon the order book and not bar based. If a big order comes into MES (why would a big order come into MES? Once its larger than 10 lots your just giving away exchange fees and probably incurring more slippage) does it effect/move the market? As long as that order is smaller than 10 times the ES market the answer is no. If you buy 1000 MES at market all you do is pay a bunch of arbitragers to convert that into a 100 lot ES order at market, which we all know is nothing. Hence isn't analyzing the MES order book relatively pointless?

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SMCJB View Post
Hence isn't analyzing the MES order book relatively pointless?

It may be. I would defer to someone who trades on the orders.

The argument you make would suggest that an order flow trader who trades MES should be watching the orders on ES instead, which is plausible to me. Because MES is relatively speaking so thin, probably any order-based decision should be made based on ES. But if someone is following ES order flow and trading MES, sometimes their trade decisions would be out of whack, because there will be differences between the two instruments.

Again, I would defer to someone who actually does it, but this does make sense to me.

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Great discussion, I've always wondered this. I have a difficult time imagining MES really affecting much of anything in the overall scheme of things.

I'm a bar trader, and trade MES based on an ES chart. I almost never look at a standalone micro chart; when I have it is nearly identical... but while trading, I sometimes get filled/stopped by MES trading a tick level here or there where ES doesn't go.

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