Relationship between a .01 move in SPY bid/ask and movement in ES bid/ask

L

logic_man

Has anyone done any research on how much the SPY has to move in order for the ES to move? Or is the causality the reverse of that and the ES has to move in order for the SPY to move? But, if that were the case, how would the SPY ever move anything other than a multiple of 2.5 cents, since that's the approximate SPY value of a single movement of the ES tick?

I'm pretty sure that this is such an obvious arbitrage opportunity that there is no arbitrage opportunity and I'm asking only because I have a strategy for the SPY in which the difference between taking a trade and not taking a trade can be .01 and I'm curious if I would be penalized in using the ES to trade that same strategy.

For example, let's say that the SPY is currently trading at 130 and the ES is trading at 1300 (yes, I know the ES is not exactly 10X the SPY, but it doesn't really matter for this example), then the SPY moves from 130 to 130.1, it seems that the way this would play out is:

SPY 130.01, ES 1300 (50% of the time), ES 1300.25 (50% of the time)
SPY 130.02, ES 1300 (50% of the time), ES 1300.25 (50% of the time)
SPY 130.03, ES 1300.25 (50% of the time), ES 1300.5 (50% of the time)
SPY 130.04, ES 1300.25 (50% of the time), ES 1300.5 (50% of the time)
SPY 130.05, ES 1300.5 (100% of the time)
SPY 130.06, ES 1300.5 (50% of the time), ES 1300.75 (50% of the time)
SPY 130.07, ES 1300.5 (50% of the time), ES 1300.75 (50% of the time)
SPY 130.08, ES 1300.75 (50% of the time), ES 1301 (50% of the time)
SPY 130.09, ES 1300.75 (50% of the time), ES 1301 (50% of the time)

So, if you do the math, I think it comes out to be a wash and that a strategy with a granularity of .01 on the SPY won't be disadvantaged when going over to the larger ES tick size. So, if I got a trade trigger at SPY 130.06, I wouldn't automatically be "overpaying" for the ES at 1300.75, if this analysis is accurate.

Of course, the assumption that, e.g. the SPY going from 130.05 to 130.06 will only trigger a move in the ES bid from 1300.5 to 1300.75 half the time, i.e. randomly, could be completely wrong historically, but I just don't have the data to know if it is or isn't.
 
This SPY/ES tick difference is something I've been thinking about recently, as well. There are quite a few factors at play here, the bigger ones being whether your strategy tends to add or remove liquidity, your commissions structure, and also the book liquidity of each contract (ie how quickly you get filled when adding, the average price you get for removing).

Ignoring commissions and fill-rate differences for a minute, a one-tick spread on SPY is narrower than a one-tick spread on ES, and both contracts typically trade at those spreads. To me that would suggest that if your strategy places a lot of market orders, you'd be better off trading SPY. On the other hand, if you do nothing but limit orders, then you're probably going to get better prices in the long run with the wider ES spread. But, again, this is making a number of other assumptions.
 
The SPY is a fund of stocks set up to replicate movements in the SPX index minus a tiny fee.

The ES are futures based on the future value of the SPX index based on a fixed expiration (in general).

ES and SPY, in my opinion, have no specific direct relationship you can arbitrage between the two, especially for a penny or two. You are not equipped to profit from a penny or two even if you could find one.
 
Quote from drp7804:

This SPY/ES tick difference is something I've been thinking about recently, as well. There are quite a few factors at play here, the bigger ones being whether your strategy tends to add or remove liquidity, your commissions structure, and also the book liquidity of each contract (ie how quickly you get filled when adding, the average price you get for removing).

Ignoring commissions and fill-rate differences for a minute, a one-tick spread on SPY is narrower than a one-tick spread on ES, and both contracts typically trade at those spreads. To me that would suggest that if your strategy places a lot of market orders, you'd be better off trading SPY. On the other hand, if you do nothing but limit orders, then you're probably going to get better prices in the long run with the wider ES spread. But, again, this is making a number of other assumptions.
More...

Because I need the nearly 24/7 access to maximize the potential of my strategy, I'm going with the ES using stop limit orders, based on what the ES "should" trade through when the SPY reaches a certain point. The amount I lose with the wider spread ultimately is worth less to me than the ability to get out of or enter a trade overnight. If I did the calculation correctly, that means I end up paying up to 1.5 cents more per SPY share equivalent for each side of an ES round trip.

Plus, as the ES is taxed at a much more favorable rate, that will also make up for the spread differential.
 
Quote from optioncoach:

The SPY is a fund of stocks set up to replicate movements in the SPX index minus a tiny fee.

The ES are futures based on the future value of the SPX index based on a fixed expiration (in general).

ES and SPY, in my opinion, have no specific direct relationship you can arbitrage between the two, especially for a penny or two. You are not equipped to profit from a penny or two even if you could find one.
More...

Hey, thanks for the reply, but I didn't mean to imply I thought there was an arbitrage play here. I agree that if there was one, it would be for someone with some kind of lightning-fast set-up to take advantage of it, not for someone who's a solo trader.
 
Quote from optioncoach:

The SPY is a fund of stocks set up to replicate movements in the SPX index minus a tiny fee.

The ES are futures based on the future value of the SPX index based on a fixed expiration (in general).

ES and SPY, in my opinion, have no specific direct relationship you can arbitrage between the two, especially for a penny or two. You are not equipped to profit from a penny or two even if you could find one.
More...

wow.
 
generally speaking, ETF's and their corresponding futures trade in a tight range. the range does move though. there are plenty of computers playing that game already. how it's best for you to play would depend upon your systems.

looking for rebates on the stock? get the edge in the more liquid future?
 
You must log in or register to reply here.
Back
Top