According to you, what makes a particular index tick if it represents large publicly held companies ? What makes it move up or down ? is it the speculators trading it or the performance of its underlying assets ?
It is you : if you sell it short, it will tick up, and if you buy it, it will tick down
If I try a serious answer: It is driven by the decisions of the investors. All of them have different knowledge and intentions. Few of them are guided by rational analysis, which is extended by heuristics. Many of them are guided by bounded rationality - this includes technical traders. There is a lot of greed and fear involved, emotions then being amplified and leading to feedback loops that drive prices outside the range of rational expectations. Computers now participate in the game, creating their own feedback loops not driven by emotions, but by a bunch of rules designed by superintelligent quants who compete against each other.
Let us say it is a big mess created for the entertainment of the few and paid by the many who are contributing their funds.
Traders get a better entertainment than they would at the Opera House, but this type of entertainment often is more expensive as well.
If it's me or you then how can the index represent its underlying assets ? Or if the index focus on U.S.-based companies how can i influence it in any way ? The index should tick according to the performance of its assets not according to some speculators that expect it to rise or decline. So the question is still opened. What makes the S&P 500 tick ? The speculators that trade it or its underlying assets ?
The underlying assets are also traded by speculators and investors. So you have speculators and investors trading the assets, the index futures, the currencies and the bond markets. Then there are arbitrageurs who buy or sell intermarket spreads. Just think about selling the S&P 500 and buying the 500 assets as a spread with 501 legs, just one of the legs being a bit larger than the other legs. Just like a centipede that has got stuck somewhere. Actually the arbitrageurs do not buy all 500, but use models to approximate this difficult task by using fewer stocks.
If you really look for a distinction between investors and speculators, you can measure it via open interest and volume: In terms of open interest (ES) or ownership (shares) investors might dominate. But most of the daily liquidity is provided by speculators, so intraday volume is mostly speculators. Sometimes, investors participate. This is what Jim Dalton calls the other timeframe participation, which means participation of investors.
I think there is a part that i don't capiche entirely. Let's suppose we build our own model in order to understand the working of an index like the S&P 500.
If we have 3 companies: Cie A, Cie B and Cie C
Let's give them a value
Cie A: 100
Cie B: 75
Cie C: 50
Average is 75. Let's pretend 75 is the current value of the free-float capitalization-weighted index that represents these companies. If you or me speculate the index value will rise or decline and trade accordingly what is most likely to occur behind the scene to keep the index value coherent with the value of the companies that compose it. In the present case, if many big speculators and/or investors trade the index in one direction say up while no speculation is taking place directly on our three companies, what would happen ? Would it move up or stay in a synchronized state with our 3 companies ?
The three would move up. If they didn't it would represent arb. Someone will step in to claim it.
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