How are futures affected by the actual market?

[SanMiguel]

The SNP index is made up of all the stocks in the S&P 500 but how does the futures price and the stock index affect each other.
If someone buys 1,000 contracts in the futures, doesn;t that affect something in the stocks?
If someone buys 1million shares in GS, what goes towards making the change in the futures?

It's all very well to say it's an auction and any inefficiency in the index or the futures will be evened out but it's done almost instantly by the computers but why have this happening at all?

Same goes for bond futures vs actual bonds.

Gold, oil, and commodity futures is a little different due to fixing prices for delivery in advance...

 

[scose-no-doubt]

The SNP index is made up of all the stocks in the S&P 500 but how does the futures price and the stock index affect each other.
If someone buys 1,000 contracts in the futures, doesn;t that affect something in the stocks?
If someone buys 1million shares in GS, what goes towards making the change in the futures?

It's all very well to say it's an auction and any inefficiency in the index or the futures will be evened out but it's done almost instantly by the computers but why have this happening at all?

Same goes for bond futures vs actual bonds.

Gold, oil, and commodity futures is a little different due to fixing prices for delivery in advance...

simple supply/demand innit? non arb theory on present (opportunity?) cost of capital, risk free rate or some other measure?
perceived value and discounting?

 

[SanMiguel]

simple supply/demand innit? non arb theory on present (opportunity?) cost of capital, risk free rate or some other measure?
perceived value and discounting?

but it happens almost immediately, ie computers are buying or selling contracts based on other stocks being bought or sold in the index - can;t be for profit as they are just levelling out the prices.

 

[Hotch]

That's sort of the point, the computers ARE arbing, and that's is why the prices level out.

 

[SanMiguel]

That's sort of the point, the computers ARE arbing, and that's is why the prices level out.

Was that always the case? Even when the futures market first started?
Also, even with the arbing, you'd expect some inefficiencies between the index and futures price and that never happens.

 

[Hotch]

Also, even with the arbing, you'd expect some inefficiencies between the index and futures price...

Would you?

 

[SanMiguel]

Would you?

Well I suppose it depends on when the arbing was set up - still doesn't address the historic price matching between index and futures when the futures market first started.
The same could be said of FX futures vs the spot forex price.

There are inefficiencies all the time in carry trade arbing, bond/equities arbing, etc.

 

[scose-no-doubt]

I reckon that if future is supposed to be priced to allow no value in terms of present cost of borrowing then as soon as opportunity presents itself I'm think one of the many many many algos out there will pick up on the gap and make the arb trade. Then another algo with pick up another arb due to that change and so on and so forth. Different funding rates available and diff cost of capital available to a lot of different organisations at any given time.

"Well I suppose it depends on when the arbing was set up - still doesn't address the historic price matching between index and futures when the futures market first started."

I've only really looked at this stuff through some basic options expiries but I'm sure it will be possible to lock in a spread by selling one and buying the other where you will still turn a profit despite borrowing costs. I'm sure that would help close the gap.
Still trying to get my head around how this would work as the prices are always moving :S
Also is the market quote or order driven? That would make a diff to whether the efficiency is real or not wouldn't it. Even so I'm sure those order+"x"pence algo's would f*ck that right up :S
Could it not also be something as underwhelming as probability based spread trading :S

There's a million people/programmes trading everything mate all the time mate. People specialised in one market and/or its futures etc. Every time you think you find a new pie there's always at least one person with a huge wallet with his finger right in the middle of it imo.

 

[Martinghoul]

Bond futures vs actual bonds works the same way as commodities.

 

[timsk]

The SNP index is made up of all the stocks in the S&P 500 but how does the futures price and the stock index affect each other.
If someone buys 1,000 contracts in the futures, doesn;t that affect something in the stocks?
If someone buys 1million shares in GS, what goes towards making the change in the futures?

Hi SM,
The relationship between futures and the cash market is addressed in this Sticky: Essentials Of 'Indices' See the section entitled: 'Cash & Futures'. Also, check out the video in 'Other Resources On T2W & Beyond' in post #3.
Tim.

 

[SanMiguel]

Hi SM,
The relationship between futures and the cash market is addressed in this Sticky: Essentials Of 'Indices' See the section entitled: 'Cash & Futures'. Also, check out the video in 'Other Resources On T2W & Beyond' in post #3.
Tim.

Exactly, the futures are a derivative but who/what is making the price the same as that if the cash index to the millisecond? If it was traders there would be an inefficiency in there somewhere.

 

[Martinghoul]

Exactly, the futures are a derivative but who/what is making the price the same as that if the cash index to the millisecond? If it was traders there would be an inefficiency in there somewhere.

How do you define "same as the cash index"? Futures will never be exactly the same, so you can never know whether futures are precisely in or out of line with the underlying.

 

[SanMiguel]

How do you define "same as the cash index"? Futures will never be exactly the same, so you can never know whether futures are precisely in or out of line with the underlying.

Overlay 2 charts of the cash with the futures contract. Different price due to financing and dividend allowance but same tick moves.

 

[Martinghoul]

Overlay 2 charts of the cash with the futures contract. Different price due to financing and dividend allowance but same tick moves.

OK, fine, let's do that... Now what happens when the tick moves aren't the same? What's your conclusion? That there's a mispricing or that something has happened to change the carry?