I believe that there is little direct arbitrage and that advanced order execution algorithms take care of the problem. I can imagine several configurations where you do not need direct arbitrage.
(a) An implementation shortfall algorithm could take advantage of a differential between the futures and the basket of stocks, by trading more aggressively when the differential widens
(b) A broker who has a sufficient inventory of the underlying basket and who executes a large order of that basket, could execute the futures market instead and take on the basket onto his own book, if the differential widens. The two positions would offset each other in the book of the broker, and he could post a profit on that without buying or selling any of the shares. Next day he could use the same approach for a reverse order, thus replenishing its original stock of the underlying basket.
In any case the futures market can react faster to these differentials. However there is a risk that the differential signals a breakout. In this case a passive implementation shortfall algorithm would increase the risk as there will be no mean reversion and the stocks would follow the breakout.
So even statistical arbitrage or implementation shortfall algorithms need a trend filter (an opportunistic component).
The following user says Thank You to Fat Tails for this post:
A) Big ES mini ( futures ) traders can't move ES prices, cos all is a weighted average of individual SP 500 stocks' prices.
B) Bids and Offers ( or sizable tape prints ) can only be taken into consideration ( when trading es mini ) as a measure of sentiment, and not actually of market forces, since in the ES mini they have no effect over the actual price?
C) Participants in the ES futures market can actually manipulate or lead ( move ) prices of SP 500 cash somehow through the arbitrage?
The following user says Thank You to para6ut for this post:
any movement in futures, etf, heavy weighted stocks, etc will have an impact on the s&p 500 cash index. if there's a big buyer in es futures, the arbitrage guys will sell futures and buy the cash to bring it back to fair value.
statement a) = false.
statement b) as bids and offers are only limit orders, they have no impact on price. but they will have an impact as soon as they get hit / executed.
statement c) yes, participants in the es futures market can easily manipulate / lead prices of the cash index.