I will vote futures as having the greater influence. This is my theory. Index futures are not subjected to demand and supply like the way the underlying stocks are. To sell stocks, you have to own stocks. To sell futures, you don't need ownership as long as you are willing to open a contract to sell. During panicky times, I would say it is futures who drive stock prices down more than the other way round. This is what happened in the 2010 flash crash and the great intra-day crash in 1987 started in the index futures market. Just my theory and not validated.
Why do stock index futures drive the prices of stock indices given that they're derivatives?
- Thread starter learner88
- Start date
Indeed, futures are more liquid and will tend to "lead" the price of stock during the periods of volatility. It's very unlikely that anyone except HF index arbitrage desks would be able to profit from the actual lag between the two.
The "derivative" bit just means that the final payoff is calculated from the price of the underlying - in this case, a basket of stocks. That is still true no matter which instrument is more liquid (in fact, you can have a derivative on a non-tradeable underlying, right?).
I think I have elaborated on the whole futures vs stock trade elsewhere before, just look it. It's an interesting topic and there is alpha in that space for those who have the structural edge to harvest it.
since when the tail leads the dog?
have you considered that overnight, the indexes might be correlating to other parts of the world? they may be expressing a temporary opinion on the upcoming market direction but it is just a temporary opinion. The underlaying will trade wherever it wants to trade. There is a reason why one is called underlying and the other is "derivative". It is not unheard off of derivatives trading out of cash occasionally (on closing)
The futures price in any future where you can easily do the "cash and carry" trade is considered the implied forward and therefore the price discovery. The index calculation in the cash market is a compilation of last trades. Which would you rather use - the implied forward or the compilation of last. They converge at expiration.
There are many exceptions, but being able to do the cash and carry trade makes the futures/forward price high value.
There are many exceptions, but being able to do the cash and carry trade makes the futures/forward price high value.
That's more or less what I was implying. Asia & Europe can drive price in the ETH, and so can anybody with a large enough account - however the day session requires participation from equities. I was implying the only time the futures 'leads' is simply due to the equity markets being closed.
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We are but ripples
On the waves that are prop traders
On the tide that are institutional.
News is earthquakes and hurricanes....
Futures traders usually get it right, which is why it looks like they're leading the market, but it's institutional investors acting in aggregate that drive the market...but they're usually driven fairly predictably by the same forces that traders choose to follow. Seeing optimism isn't the same thing as generating it.
On the waves that are prop traders
On the tide that are institutional.
News is earthquakes and hurricanes....
Futures traders usually get it right, which is why it looks like they're leading the market, but it's institutional investors acting in aggregate that drive the market...but they're usually driven fairly predictably by the same forces that traders choose to follow. Seeing optimism isn't the same thing as generating it.
The underlying spot drives the future price on equity indices.
It is so, and without contestation.
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Free bonus tip!
Watch the ES very carefully as it compares to the S&P. When that ES is sitting in a small little range and it jumps a point, you'll see a much more magnified jump in the YM/DOW.
It is so, and without contestation.
______________
Free bonus tip!
Watch the ES very carefully as it compares to the S&P. When that ES is sitting in a small little range and it jumps a point, you'll see a much more magnified jump in the YM/DOW.
If you go to the SPX pit at CBOE or the big SPY desks you will see everything prices of the futures. The SPX pit at CBOE even (still) has what are called MERC CLERKS who hand signal in the last two decimals as the running from the bid/offer. The futures price is even referred to as the implied forward.
Why can you buy 1,000,000 SPY and hundreds of thousand of the options without moving the market.
As long as I can do the cash and carry trade the implied forward is the price discovery.
That does not mean every future is the price discovery. Where it cumbersome or I simply can't do the cash the future provides some information, but true price discovery becomes a bit less clear and traders will use what they can, but markets will represent that lack of true transparency.
Two classic examples are VIX and energy markets where there is not true trade-able underlying.
In energy the only folks who can trade a true underlying are people with actual product on tankers or in storage. This one reason why the big energy firms operate large trading operations, because they have a huge edge.
Why can you buy 1,000,000 SPY and hundreds of thousand of the options without moving the market.
As long as I can do the cash and carry trade the implied forward is the price discovery.
That does not mean every future is the price discovery. Where it cumbersome or I simply can't do the cash the future provides some information, but true price discovery becomes a bit less clear and traders will use what they can, but markets will represent that lack of true transparency.
Two classic examples are VIX and energy markets where there is not true trade-able underlying.
In energy the only folks who can trade a true underlying are people with actual product on tankers or in storage. This one reason why the big energy firms operate large trading operations, because they have a huge edge.
I understand and you're (sort of) right. But what I was trying to say is that the futures "leading" outside of RTH is debatable. If you consider what the definition of the futures market is (place where risk is transferred from those that don't want the risk to those that are willing to accept it) then the "lead" effect is no so "lead" any more.
Consider following two different scenarios:
1. Overnight futures drop (for whatever reason, i.e. hedging the risk) but on the equities open participants decide that the price is advantageous (low) and start buying. How is that for futures "leading"?
2. Equities end at 4pm but ES RTH is until 4:15. The price move you see during that last 15min of ES RTH is not correlated 1:1 to equities and is hardly "leading" them, you just have traders scrambling to close out the business for the day.
I'm too dumb to know about implied forwards and such. What I simply say is that overnight futures price is not leading anything. It i some sort of opinion where the market value "might" be but the only thing that matters is during trading hours of the underlying. That's when you will see that the underlying will trade where it wants to trade, not where the futures was "leading" it. One could say that I'm arguing about the semantics