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The Dow cash follows the Dow futures not the underlying cash value - explain?
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The Dow cash follows the Dow futures not the underlying cash value - explain?

  #1 (permalink)
Trading Apprentice
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The Dow cash follows the Dow futures not the underlying cash value - explain?

I've this quote: 'The movement of the Dow cash follows the Dow futures not the underlying cash value'.

Can someone expand on this statement [for indexes in general perhaps not just Dow]? I'm assuming the 'underlying' are the shares of the index [the components of the index]? I thought that arbitrage or something kept the cash value of the index components in line with the value of the index-- or something - i dunno?

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  #3 (permalink)
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I heard it was the cash follows the underlying dow futures collateralized by the cash dow index options carried off-balance sheet by the fed in the form of reverse swaps with the Chinese government. Is what I heard.

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  #5 (permalink)
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quote: 'The movement of the Dow cash follows the Dow futures not the underlying cash value'. ??

I'm thinking [right or wrong] that the Dow Cash in the quote is referring to the Dow Index value? The Index IS calculated from the value of the underlying stocks. But in another thread FatTails says we can't trade the Index without trading a basket of the underlying. So when I trade my CFD of the DOW, the value of that CFD is based on the futures price not the cash price?

The futures price can [I guess?] theoretically go where it wants [it's a market], but in practice holds tightly to the index value because of arbitrage [fair value between the cash and the futures]. Is that getting closer??

So to try and answer my own question.Hmmm The futures price has to follow the index cause of arbitrage between the two [between trading a future and a basket of the index - for those who can afford it]?? But in theory the futures price can go anywhere - it's a market.

And apparently FatTails says [can't use links yet too new here] the CFD of the index can be anything the broker says, but I'm thinking under 'normal' conditions it's tied fairly close to...hmm both index and futures ?? lost here [probably got lost a lot earlier]. Anyone?

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All that is basically correct, you can calculate any index yourself using the published formulas. The futures will be kept close by arbitrage and, although heavy force in futures or baskets can push/pull one side more than the other for a time, ultimately the futures has to follow the cash.

I suspect what you/@Fat Tails may also have been referring to is that CFD providers who still use the MM model can use their own client position offsetting to move it a long way from the underlying, something that DMA is intended to limit.

For CFD's this is a must read Contract for difference - Wikipedia, the free encyclopedia (I particularly like the Aussie ASIC comment in the Criticism section....)

For little fish trading the only useful difference I have ever noted is that national main session cash index time-ordered high-low data works best for EW, whereas Fibonacci measured moves work best on electronic hours futures data.

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Thanks ratfink. Without confirmation [and with so many unknowns-unknowns lurking] it's hard to know if I've got the jist of something or not.

The CFDs at IB are DMA, the commissions are the same as the stocks and they make a big show of pointing out the spread is the same. I just wanna trade as much as I can as small as I can n they seem ok for that?? I'm aware of counterparty risk, but I'm not feeling the fear on that count...I'm unsure about the suitability of learning the DOM through CFDs though - don't know about the aggregate feed IB provide n don't know where the volume measures come from in CFD [as its not a true market?] - I'll put those Qs in another thread. Thanks again.

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