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What controls the ES arbitrage value?
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What controls the ES arbitrage value?

  #1 (permalink)
Trading Apprentice
St.John's, Canada
 
Futures Experience: Beginner
Platform: IB TWS
Favorite Futures: ES
 
Posts: 3 since Jul 2015
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What controls the ES arbitrage value?

So I'm new to futures trading...this may become obvious. I'm trying to understand the relationship between the direction of ES to the direction of the SPX. In my mind if persons are only looking at the ES, the price of ES could randomly trail off in some direction further and further from the SPX. I think there must be some force that keeps the ES central about the SPX. What is it that keeps it central around the SPX?

For example is some large institution looking at the difference between SPX and ES (arbitrage) and buying/selling based on that difference and driving the price back near the SPX value? Or maybe the long term contract holders are driving the difference when they regularly purchase huge lots of ES and hold them til near expiry?
Thanks!

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  #2 (permalink)
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  #3 (permalink)
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may want to check this thread

"https://futures.io/vendors-product-reviews/36186-hank-camp-programtrading-com.html"

thnx

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  #4 (permalink)
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It is controlled by the Law of One Price, the time value of money, and math.

Math. A gateway drug to reality.
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  #5 (permalink)
Market Wizard
Germany
 
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rnorman View Post
So I'm new to futures trading...this may become obvious. I'm trying to understand the relationship between the direction of ES to the direction of the SPX. In my mind if persons are only looking at the ES, the price of ES could randomly trail off in some direction further and further from the SPX. I think there must be some force that keeps the ES central about the SPX. What is it that keeps it central around the SPX?

For example is some large institution looking at the difference between SPX and ES (arbitrage) and buying/selling based on that difference and driving the price back near the SPX value? Or maybe the long term contract holders are driving the difference when they regularly purchase huge lots of ES and hold them til near expiry?
Thanks!

Like many beginners you got the wrong impression that only because indexes like the S&P, the Dow, the DAX etc. are
cited in the media they would also be the gauge for trading. You will be disappointed, but they are not. Why? Because
you cannot trade the indexes directly, they are only calculatory, no supply, no demand - simple as that.

Index futures in contrast are tradeable assets. So the normal* situation for arbitrage is that supply or demand surpluses
in the index futures give the direction and arbitrage via portfolio/basket trading of index stocks follows. At the end of the chain,
index values are recalculated.

* An exception are disruptive events in single index stocks; if the weight of the stock is heavy, this can cause a start of the
arbitrage process on the portfolio side.


P.S.: A common rookie mistake would be searching for the prognostical value of index values for trading the futures -
there is none, as the index values are calculated afterwards.


Last edited by choke35; July 14th, 2015 at 07:38 AM.
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  #6 (permalink)
Trading Apprentice
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choke35 View Post
Index futures in contrast are tradeable assets. So the normal* situation for arbitrage is that supply or demand surpluses in the index futures give the direction and arbitrage via portfolio/basket trading of index stocks follows. At the end of the chain, index values are recalculated.

Thanks choke35 and all, you guys are great. I don't expect you guys to explain every detail so i'm doing some reading trying to find an example of a futures arbitrage execution step by step in laymen terms....no luck so far.

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  #7 (permalink)
Market Wizard
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rnorman View Post
Thanks choke35 and all, you guys are great. I don't expect you guys to explain every detail so i'm doing some reading trying to find an example of a futures arbitrage execution step by step in laymen terms....no luck so far.

np, yw

Since most arbitrage is done automatically, you could use e.g. B. Johnson's "Algorithmic Trading & DMA",
Chapter 13.6 Arbitrage Strategies, as a start. The chapter also gives many links for further research on
arbitrage of futures, options, ETFs, and cash assets.

The general theory of arbitrage (Arbitrage Pricing Model by Ross included) dates back to the 70s of the previous century.


Last edited by choke35; July 15th, 2015 at 12:51 PM.
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  #8 (permalink)
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The arbitrage value is the fair market value, see explanations in post as per link below:

https://futures.io/commodities-futures-trading/13380-fair-market-value-fmv.html#post151759

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