How do NQ and QQQ track so closely?

[FortuneTeller]

I used to also wonder about this a long time ago when I first traded QQQ, then moved to NQ. Back then, I had no idea.

 

[schizo]

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!

Well, that's easy: Algos.

The harder question is, which controls which? I would think the spot price dictates derivatives like NQ. But if you've witnessed the Flash Crash, you would also know the futures can ultimately spill over into the spot market and create havoc.

 

[Dollardogs]

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

Have a nice day.

Interesting, where you getting 36.75 from? I'm a day trader on the 5 min chart. Every 5 min candle I've compared it's more like 42.

 

[Dollardogs]

Well, that's easy: Algos.

The harder question is, which controls which? I would think the spot price dictates derivatives like NQ. But if you've witnessed the Flash Crash, you would also know the futures can ultimately spill over into the spot market and create havoc.

Okay, "algos" sure. But you've got different sets of people trading each. Not everybody who buys in and out of QQQ is also in the futures market. You might get some huge order in the one that ain't equally placed in the other. So how the hell do they stay so synced?

 

[Dollardogs]

I used to also wonder about this a long time ago when I first traded QQQ, then moved to NQ. Back then, I had no idea.

The setups I use are penny neat on QQQ oftentimes. That won't be the case at all with NQ so I'm wondering if it's dumb eventually to just trade NQ but off QQQ signals. And if they ever decoupled, I'd have some extra work to do.

 

[Dollardogs]

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.

This place really is full of aphasic chatbots still working out the kinks.

 

[Dollardogs]

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

Yep, that's close to what I've found. It's been 42.58 or so for me, aka $850 for every dollar move of QQQ. But how the hell do they track so consistently, ESPECIALLY when you consider the one trades times the other don't.

 

[Dollardogs]

^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.

That sorta makes sense. So if I'm understanding you're basically saying the syncing is consciously executed and monitored to prevent arbitrage opportunities, but why do the HFT guys care? I don't get what the interest in keeping them aligned stems from.

 

[Slow Learning Elf]

Okay, "algos" sure. But you've got different sets of people trading each. Not everybody who buys in and out of QQQ is also in the futures market. You might get some huge order in the one that ain't equally placed in the other. So how the hell do they stay so synced?

Whichever one has more notional volume per day (ie multiplier * price * volume) is usually the one driving the pricing. For example, in case of S&P500 it’s gonna be spooz

 

[Slow Learning Elf]

That sorta makes sense. So if I'm understanding you're basically saying the syncing is consciously executed and monitored to prevent arbitrage opportunities, but why do the HFT guys care? I don't get what the interest in keeping them aligned stems from.

HFT guys frontrun the basis/ETF-arb guys - they know if dislocation is big enough, the guys who can hold inventory will get involved. So they know they are back-stopped