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Do stocks in SPX Index drive the price of S&P 500 Futures lead contract during RTH?
The E-Mini S&P 500 futures pretty much mimics the SPX cash index which is calcuated from underlying stocks during the Regular Trading Hours (RTH) session. This suggests the Price Action is being created by big money in the underlying stocks, not big money buying and selling futures, do you agree ?
This is quite amazing considering using Technical Analysis (TA) we can calculate S&P 500 E-mini futures Price Action (PA) (alot of times to tick accuracy) using Measured Moves, trend lines etc. which almost suggests that big smart money is calculating where futures price will land if they buy/sell certain amount of underlying stocks.
Actually, it suggests that arbitrage between the cash and the futures markets, which goes both ways by the way, keeps the two markets in step. Arbitrage between S&P stocks and the ES futures is possible because large holders of stock can have a portfolio of stocks that resemble the entire S&P in their movements. Often, they will hedge their stock holdings with offsetting positions in futures.
If either the basket of stocks representing the S&P or the ES futures gets out of whack compared to the other, even by a small amount, then it pays for the arbitrageurs to buy one (the lower) and sell the other (the higher), which locks in a small but sure profit based on the spread, and which also has the effect of moving them back together again. The amount of money in arbitrage is large enough, and it is a good profit source if a firm has (very) deep pockets and is (very) nimble. The opportunity provided by the price difference is small and won't last for long when there are a lot of firms competing to capture it, and the competition makes sure it never gets large.
Obviously, arbitrage goes the either way between stocks and futures. If futures move first due to buying in the futures market, that creates an arbitrage opportunity that will be jumped on, and there sill be arb-based buying in stocks and selling in ES. Neither is the "one" that is moving the other. They influence each other.
If this didn't happen, it would be impossible to use futures to hedge a stock portfolio, because that requires there to be a stable relationship between futures and stocks. But if hedging were not possible, there would be no stock futures at all.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
