How do NQ and QQQ track so closely?

[Dollardogs]

I'm currently trading QQQ while getting ready to switch eventually to NQ. Does anyone know how the two track so closely? It looks like a $1 move in QQQ corresponds to about a 42.5 point move in NQ. I'm curious how that happens and how dependable that is longterm, because all of my strategies are tied to very specific QQQ price moves, and if I can switch to futures, while still using QQQ for my entry and exit signals, that would be easier. Thanks in advance for any info!

 

[Sekiyo]

Don’t you know they both track the Nasdaq-100 index ? That’s why the correlation between these two instrument is near 1 (0.98).

 

[Dollardogs]

Thanks scoop. Of course I know that. Question is how do they do it so uniformly?

 

[Dollardogs]

This thread is off to its usual great sunday morning start.

 

[Sekiyo]

Based on 52 weeks high / low
1 QQQ point is 36.75 NQ points.

Have a nice day.

 

[2rosy]

Arbitrage
Creates/redeems

 

[Arnie]

https://en.wikipedia.org/wiki/Kids_Say_the_Darndest_Things

 

[Real Money]

Cash and carry arbitrage and Reverse cash and carry, i.e. Index Arb.

An arbitrageur will source cash, pay (or forego) the risk free rate, buy a replicating portfolio (or similar) on margin, and short the contract. He will receive weighted dividends and deliver the asset at the contract settlement price and date (afforded the option to settle in cash), and with the option to loan out the shares at the prevailing borrowing rate (while being market neutral).

The reverse is opposite in all respects.

 

[Concinnity]

Yeah like other said they track same underlining. The math they give is off though if you're looking for intra-day trading relation:

1 Dollar QQQ move = 40 NQ points

or

every 2.5 cents of QQQ = 1 point of NQ

Because 800 shares of QQQ is equivalent to 1 NQ Mini.

40 NQ points x $20.00 per point = $800.00

1 QQQ Dollar x 800 shares of QQQ = $800.00

 

[Slow Learning Elf]

Arbitrage
Creates/redeems

^This. You guys don’t appreciate this, but this is really describes fully what’s happening.

The futures are arbitraged (in the longer horizon) via cash-and-carry aka futures basis arb, which these days is most a funding and balance sheet game. The ETF is arbitraged (again, in longer horizons) via creates (if it’s cheap compared to the NAV) or redeems (if it’s rich compared to the NAV), which is also a balance sheet and borrow game.

Both of these are very well known trades, so now HFT guys bring the futures and the ETF in-line on real time basis expecting that both kinds of arbitrageurs are gonna get involved if dislocation persists.