I've noticed that whenever ES trends during overnight session, SPY at the NYSE opening will allways gap in the same direction to "catch up" with future's price. This makes me wonder how does the mechanizm of interaction of the cash market index(SPX) ETF(SPY) and future(ES) work? Who is the leader and who is the follower, whats the reasoning behind this?
The composite index represents the underlying stocks and is not tradeable by itself, unless you trade all of the stocks in the index, hence the need for futures and ETFs which provide a single instrument to trade the index. They stay in sync through a process called arbitrage, Arbitrage - Wikipedia, the free encyclopedia
vegasfoster, thank you, I understand this, however I still do not understand the mechanizm of SPY gapping up or down to catch up with ES. Why does this happen, how the opening price of SPY is determined, does this mean that ES is the leader? Why?
spy is an etf and depending on your broker trades similar hours to equities including premarket I believe ... so it probably reflects more closely to futures when $SPX is not moving yet pre or after market , I haven't but if you read the prospectus to spy or any etf it will show what the tracking is supposed to be , so I imagine that when $SPX opens , if that is what it tracks , it will revert back, I would think
$SPX cash index is regular market hours and it to has some catching up to do to reflect global trading ...
so a gap is formed quite often, and quite often that gap is eventually filled when markets resume.... or at a later time
just my own thought and opinion expressed, best to read the documentation from prospectus and exchanges if you want to know more .... things like dividends, costs, and whatever else they use in the calculation should be considered
GridKing, you mentioned that S&P500 stocks traded worldwide, this is good point, I never really thought of it. Do they trade on different exchanges on a 24 hour basis? Doesn't this mean that the SPX itself is a leader and ES and SPY are catching up through arbitrage?
While the underlying stocks on the S&P 500 may trade overnight, the actual index only tracks them during US market hours. Whereas the futures that trade overnight can track the individual stocks and project it's value in real time.
When the market opens, the SPX then gaps to what the value of the underlying stocks require it to be.
So... (if I understand all this correctly), the underlying stocks ultimately lead both the value of the actual index as well as the futures that correspond to them, and the gap is due to the index only tracking during US market hours.
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Probably so, but what it boils down to is whatever is used to actually calculate the $SPX which needs to be learned from Standard and Poors prospectus , there are things we don't really consider which go into the calculation...
for instance the Dow, is calculated much differently and uses a multiplier , which btw they changed that multiplier when things were dire in 2008 , IMO it was manipulated to reflect more positively, but I am not a complicated math person
Just to add, and perhaps help , take 2x etfs (perhaps one that is meant to track 2x of a percentage move) for instance and slippage, if those etfs are off when the close occurs , they recalculate overnight as well as to consider dividends that were paid in underlying stocks and may open much differently than the close in addition to being traded after hours....
it's good stuff to know and at least understand somewhat or things don't make sense or worse lose money and not know why....
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