How market makers work in Futures

[demoship]

arbitragers can use MANY tools to arbitrage futures price descrepencies.

Options, do a synthetic long/short with those -- that's equivalent to a future, EXACTLY equivalent, with just pin risk if it's a stock, if it's an index they're cash settled, so it's totally risk free.

For the S&P.. spiders. Those follow the S&P500 very closely, which makes it useable for arbitrage.

Basket-trade all 500 stocks, if you're doing it on a big enough scale, you can do this too.

 

[z32000]

I'm a little confused here...

can someone clarify that these are true statements...
so basically, futures is a zero sums game...
if there is a big gap between futures and cash...
one will compensate for the other...
I would think this would be in real time automatically...

So does this mean, everyone who is getting into futures can be winners because for every winner there must be a loser...
so everyone can win in futures and the loser could end up be the average Joe buying regular stock (cash)....

or does the loser have to be a person who bought the futures contract...

To reiterate my question, can everyone if futures be winners?

 

[gov]

Quote from z32000:

I'm a little confused here...


To reiterate my question, can everyone if futures be winners?

It would be possible given an infinite timeline, but we do not have that.

 

[BoyPlunger]

No because every time a futures contract is bought, there is one that is sold or written to offset it. thus for every long, there is a short. with stocks, there are much fewer shorts. it is possible that in a stock, there are only long holders. thus if the stock and market keeps going up, everyone involved in the cash market would be winners, but the net win by long futures traders would be exactly offset by the net loss of short futures traders.

 

[gov]

Quote from BoyPlunger:

No because every time a futures contract is bought, there is one that is sold or written to offset it. thus for every long, there is a short. with stocks, there are much fewer shorts. it is possible that in a stock, there are only long holders. thus if the stock and market keeps going up, everyone involved in the cash market would be winners, but the net win by long futures traders would be exactly offset by the net loss of short futures traders.

But this is the point. The time element is what make the market zero sum. Remove this contrivance and the market is not zero sum.

 

[nonlinear5]

Quote from z32000:

the reason why i ask is that...
I trade futures just because of the amount of leverage I can get from trading them....

Can someone wealthy enough to buy a lot of future contracts (but not wealthy enough to by stocks) cause destablization within the futures market.

Say for example, Warren Buffet can afford to buy 2 major companies in the S&P 500 and cause the market to slightly shift...

but on the other hand, I would assume that he might be able to buy the entire ES contract and cause even more instabilty or wider spreads (or at least have the power to turn the entire futures contract upside down).

Yes, it's possible, although the ES market is believed to be too large to be cornered easily. The nominal value of the open interest for just the front month ES contract is somewhere around $150 billion. Warren Buffet would have to conspire with Bill Gates and then some other folks to come up with all the dough. And even if you put that much money on the line, you still have to figure out how you are going to get rid of all these contracts once you buy 'em all.

 

[BoyPlunger]

Quote from gov:

But this is the point. The time element is what make the market zero sum. Remove this contrivance and the market is not zero sum.

time has nothing to do with it. how would it not be zero sum if there were no expiration date on the contracts?

What makes futures zero sum is that they are not underlying entities. They are derivatives; legally binding contracts. Someone purchased a contract and someone else wrote the contract. No one "writes" stock contracts. They just are. Unless you want to get philosophical and say that when the company that went public, they shorted stock to the IPO investors.

 

[z32000]

I thought that the system adjusts itself to create future contracts automatically...this would mean the system automatically does write contracts if needed...


for example, if a major investor bought up all the contracts and then there was a rise in demand on that contract which caused a major price difference between the futures contract and the cash stock.... I thought this is when the system kicks in automatically writing contracts.

 

[boblocks]

Quote from gkishot:

There are no market makers in futures.

yes there areyou idiot. Maybe not in the front month S&P but in most futures there are. Christ, get a clue.

 

[E23]

there is no "float"