Es follows spx

JackRab · Sep 5, 2016

hurricane_sh said:
It may sound silly, but this is my most important conclusion after watching es chart for months.

es follows spx, but spx doesn't follow es. Think about it, if spx movs, es must follow it, but if es moves due to imbalance of buy and sell, spx may not follow.

I find it really amazing that es can be so trendy, despite any technical signals.

It's all about arbitrage... if ES deviates too much from the underlying index, you can trade the EFP... (exchange for physical), which is basically a swap between the future and all underlying stocks.

So, say if the EFP is trading at +0.45 and the index trades at +1... you can sell the index basket and buy ES and buy the EFP. Result is no position and +0.55 profit -/- costs, which are probably a bit high since you're trading a 4-legged monster with lots of stocks...

thaitye · Sep 12, 2016

JackRab said:
It's all about arbitrage... if ES deviates too much from the underlying index, you can trade the EFP... (exchange for physical), which is basically a swap between the future and all underlying stocks.

So, say if the EFP is trading at +0.45 and the index trades at +1... you can sell the index basket and buy ES and buy the EFP. Result is no position and +0.55 profit -/- costs, which are probably a bit high since you're trading a 4-legged monster with lots of stocks...

Exactly, what people aren't understanding is that enough demand in the /ES contracts can cause the SPX to follow the /ES. Through arbitrage trading the money through the /ES contracts will flow into the underlying.

JackRab · Sep 12, 2016

thaitye said:
Exactly, what people aren't understanding is that enough demand in the /ES contracts can cause the SPX to follow the /ES. Through arbitrage trading the money through the /ES contracts will flow into the underlying.

Correct. Also, if you need a quick hedge or exposure everyone tends to go for the futures first since they are straightforward and quick. You know what your exposure is when you hit 1000 ES futures.. 100 mln exposure in a broad market, while if you would go with the stocks first you never know what you end up with...