Side effects of futures trading during opening given absence of index arbitrage outside regular hrs

H

helpme_please

I am trying to wrap my head around this with textbook knowledge.

Index futures trade outside the regular hours of stocks. During Asian hours, ES trades but U.S stock exchange is closed. During these non-US hours, index arbitrage cannot be done. ES price can diverge a lot from the underlying stocks value during the non-US hours because arbitrage is not present to keep the values in step. So, during the opening hour when the stock exchange opens, wouldn't there be chaos during panicky time? Say, ES trade >3% down. When the stock exchange opens, wouldn't this cause an avalanche of sell orders of the underlying stocks? Why are index futures such as ES allowed to trade outside normal stock trading hours given the absence of index arbitrage?
 
it will get arbed right away as soon as the market opens ... what do you have against people trading overnight ... that still isn't clear to me ?
 
cvds16 said:
it will get arbed right away as soon as the market opens ... what do you have against people trading overnight ... that still isn't clear to me ?
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Nothing against them at all. Just trying to understand things. Being curious. That's it. I'm still a newbie with a track record of losing money in trading index futures today.
 
Our Indexes pretty much mimic foreign markets during night and unlike before, we seldom have huge gaps before years 2000. Much more spreading goes on during the night.
 
helpme_please said:
I am trying to wrap my head around this with textbook knowledge.

Index futures trade outside the regular hours of stocks. During Asian hours, ES trades but U.S stock exchange is closed. During these non-US hours, index arbitrage cannot be done. ES price can diverge a lot from the underlying stocks value during the non-US hours because arbitrage is not present to keep the values in step. So, during the opening hour when the stock exchange opens, wouldn't there be chaos during panicky time? Say, ES trade >3% down. When the stock exchange opens, wouldn't this cause an avalanche of sell orders of the underlying stocks? Why are index futures such as ES allowed to trade outside normal stock trading hours given the absence of index arbitrage?
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You're making an assumption that the individual stocks fall on open because they're being arbitraged to match ES. If ES didn't trade overnight, whatever it was that was putting downward pressure on the index would still exist and stocks would still gap down on open. ES is the tail and I don't think there's any compelling research that it's wagging the dog on open.
 
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