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Interaction between a financial index futures market and the corresponding index.
I'm new to futures trading and have a question relating to the interaction of the actual S&P 500 index and the S&P E-Mini. This past friday 1/22, the market was hovering around and testing the 1900 level most of the day. It seemed to me that it was the futures 1900 level that was actually more controlling. Is this correct? Also, how do the two markets remain so linked? And finally, which market moves first, futures or the S&P? Thanks in advance for your time.
Can you help answer these questions from other members on NexusFi?
1. If the markets become too far out of line, the stat arb firms will step in to close the gap for example by selling the futures, and buying the entire S&P 500 basket.
2. At cash open, ES futures contract will usually drive the action since the arb close will try to reconcile the gap between the futures contract and the spot market. This is pretty straight forward since the ES trades during ETH overnight while most of the equities do not. So any mis-pricing by the basket or individual components will likely be arbed out.
3. After say the first 30 minutes of cash open, typically the underlying basket goes into the drivers seat.
There was a major option barrier in place for the ES 1900, that's why you saw that type of price action on Friday.
There are arb hedges coming in all the time, these days. The proportion of HFT's grows and grows.
Price movements in the S&P are determined by imbalances between buying-pressure and selling-pressure for the S&P, and price movements in the e-mini S&P are determined by imbalances between buying-pressure and selling-pressure for the e-mini S&P. This is absolute and inevitable. Significant discrepancies between the two tend to be brief, though, because of all the automated HFT's.
minutest of hedges can be seen imho. hfts may or may not matter in ES. The Bigger Boyz also use exact or better programs.
however there are distinct nuances of correlations between cash and futures which an astute trader should be able to catch especially if they are able to track money flow of cash and ES. Works in all timeframes from the 1mins to much larger.
the spreed between the two is call the prem .. algos do kick in and trade it when it is out of balance. if you have IQ feed you can chart it. if you get camp co. free market report you can see what level they would expect that to happen. that does not mean you can figure all that out .and do any thing with that info...
Nasdaq index finished yesterday above 7000 for the first time ever in history, but front month NQ futures is only trading at a little over 6510 at yesterday close. Can someone help me understand why this big difference for NQ/Nasdaq? I checked ES/sp500 and they're pretty close
