Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Rocky Mtn Trader

Understanding the Auction Process

Recommended Posts

To be honest, I'm still not 100% sure I understand. For there to be an arbitrage opportunity between the futures and the cash, there is an implicit assumption (perhaps correct) that the futures can move due to factors outside of the futures themselves (such as the price of the underlying).

 

If this is the case:

 

1. Why can the futures and the cash be out of sync greater than the fair value premium?

2. Why is there an expectation that if they are out of sync greater than fair value that they will revert back to being in sync?

 

Answering "because of arbitrage traders" is not sufficient. If they can get out of sync, then the futures is a pure market and there is no guaranteed reversion back to cash. On the other hand, if the futures market automatically moves in step with cash (+/- premium) then why should it ever be out of sync?

 

The question really becomes, if the futures and cash are in sync, how is it done? Is it because market players have 'agreed' to keep them in sync? Or is it the underlying market automatically moving back to fair value (ie the actual exchange keeping them in sync?). I don't see how this would work.

 

The easiest form of the question: what is to stop a big player from holding the price up artificially in the futures as the cash crashes down?

Share this post


Link to post
Share on other sites

Ignore my post above, I've worked it out. The arbitrage opportunity exists if the intention is to hold the basket of stocks (or the 'cash' index) and the futures contract until delivery. Your price for both has been locked in, and therefore you are guaranteed a profit on delivery of the future.

 

Anyone who wants to read more go here:

 

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/futurearb.htm

 

You can see that effectively there is a 'band' in which the futures will stay before they are arb'ed back in line. It is not a single value based on 'fair value' of the premium, as there are transaction and interest costs associated with buying or selling the stock basket, and there is a risk inherent in expecting dividends at certain times from certain stocks. Interesting read.

Share this post


Link to post
Share on other sites

Gooni,

 

Harris puts forward two main sets of circumstances that give rise to arbitrage opportunities.

 

1) Slow price adjustment - here common factor values change but not all prices that depend on those factors change appropriately. Usually one or more prices are slower to change.

 

2) Uninformed traders demanding liquidity - here fundamental values are constant but uninformed traders cause prices to change as they buy in some markets or sell in other markets. Arbitrage trading connects demands for liquidity that traders make in different markets.

 

He goes on to explain how in the second scenario arbitrageurs act as risk repackagers and essentially are derivative product 'manufacturers'. Briefly if they buy the underlying and sell futures they provide long liquidity if they sell underlying and buy the futures they provide short liquidity. The arbitrage spread (the difference between the basis and fair value) is the compensation that arbitragers receive for there services.

 

As you can see if arbitragers wait for the spread to be large (so more profitable) they will likely loose out to more aggressive arbitragers.

 

Cheers.

Share this post


Link to post
Share on other sites

I didn't really know where to post this, but I am interested in the Auction Market Process.

 

First, this is really a tapestry of ideas if you will. The underlying goal, or thread weaved through out is Price discovery/ The Duel Auction Market. I believe that WRBs are areas of change in the market. As I stated in the WRB thread, I see them as Supply(sellers)/Demand(buyers) Delta zones. Of course not all WRBs are created equal. But that is for another post in another place. The Idea of a zone where changes in the supply/demand dynamic are taking place lead me to want to "drill" down and see the interaction between market participants. That is to say, to view the Duel Auction as it takes place.

 

The first chart shows that "drilling down". This is a 1 minute chart showing the market going from one that is dominated by sellers to one that is dominated by buyers. After all, At it's base level, a market moves up to find sellers and down to find buyers. As Bill Williams puts it, a markets sole purpose is to find that place where there is a disagreement on value but an agreement on price. This is why a market can not be oversold or overbought. There is always someone on the other side and price by definition is an equilibrium. Although constantly in flux.

 

Anyway, this set up happens within the range of a significant WRB from a 10 min chart. A selling bar is created at point A but there is no follow through. The Market turns up and we see a buying bar (higher high than the previous bar but not a lower low) that does have follow through. Note the open and the close of the bar. The buyers were in charge the through out that period. We open in the lower third and close in the upper third: a climber.

 

The Sellers make one more attempt to take the market down at point C. Again, there is no follow through. Notice that the market was heading down but now the sellers don't have the steam they once did: something has changed. Interestingly, we are in area of likely change (body of a WRB__).

 

The second chart has no trade set up but what I like about it is how it shows the tug of war between buyers and sellers. From a MP point of view, we go from vertical (trend) to horizontal movement (consolidation). Or out of balance into balance. Two consecutive lime paint bars create a large Balance area. I think on can actually see the bulls and the bears fighting it out. We have price rejections at the high of the balance areas, No demand bars, No supply bars, Squats, Climbers, Drifters, Market facilitation increasing (paint bars). I am I kidding myself here?

MATS2.thumb.png.e2fa8611af2eba8c39d47b4ba4c81cda.png

MATS3.thumb.png.a67f35cc9d10b4778292d4c5ccee90a0.png

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • Date: 3rd April 2025.   Gold Prices Pull Back After Record High as Traders Eye Trump’s Tariffs.   Key Takeaways:   Gold prices retreated after hitting a record high of $3,167.57 per ounce due to profit-taking. President Trump announced a 10% baseline tariff on all US imports, escalating trade tensions. Gold remains exempt from reciprocal tariffs, reinforcing its safe-haven appeal. Investors await US non-farm payroll data for further market direction. Fed rate cut bets and weaker US Treasury yields underpin gold’s bullish outlook. Gold Prices Retreat from Record Highs Amid Profit-Taking Gold prices saw a pullback on Thursday as traders opted to take profits following a historic surge. Spot gold declined 0.4% to $3,122.10 per ounce as of 0710 GMT, retreating from its fresh all-time high of $3,167.57. Meanwhile, US gold futures slipped 0.7% to $3,145.00 per ounce, reflecting broader market uncertainty over economic and geopolitical developments.   The recent rally was largely fueled by concerns over escalating trade tensions after President Donald Trump unveiled sweeping new import tariffs. The 10% baseline tariff on all goods entering the US further deepened the global trade conflict, intensifying investor demand for safe-haven assets like gold. However, as traders locked in gains from the surge, prices saw a modest retracement.   Trump’s Tariffs and Their Market Implications On Wednesday, Trump introduced a sweeping tariff policy imposing a 10% baseline duty on all imports, with significantly higher tariffs on select nations. While this move was aimed at bolstering domestic manufacturing, it sent shockwaves across global markets, fueling inflation concerns and heightening trade war fears.   Gold’s Role Amid Trade War Escalations Despite the widespread tariff measures, the White House clarified that reciprocal tariffs do not apply to gold, energy, and ‘certain minerals that are not available in the US’. This exemption suggests that central banks and institutional investors may continue favouring gold as a hedge against economic instability. One of the key factors supporting gold is the slowdown that these tariffs could cause in the US economy, which raises the likelihood of future Federal Reserve rate cuts. Gold is currently in a pure momentum trade. Market participants are on the sidelines and until we see a significant shakeout, this momentum could persist.   Impact on the US Dollar and Bond Yields Gold prices typically move inversely to the US dollar, and the latest developments have pushed the dollar to its weakest level since October 2024. Market participants are increasingly pricing in the possibility of a Fed rate cut, as the tariffs could weigh on economic growth.   Additionally, US Treasury yields have plummeted, reflecting growing recession fears. Lower bond yields reduce the opportunity cost of holding non-yielding assets like gold, making it a more attractive investment.         Technical Analysis: Key Levels to Watch Gold’s recent rally has pushed it into overbought territory, with the Relative Strength Index (RSI) above 70. This indicates a potential short-term pullback before the uptrend resumes. The immediate support level lies at $3,115, aligning with the Asian session low. A further decline could bring gold towards the $3,100 psychological level, which has previously acted as a strong support zone. Below this, the $3,076–$3,057 region represents a critical weekly support range where buyers may re-enter the market. In the event of a more significant correction, $3,000 stands as a major psychological floor.   On the upside, gold faces immediate resistance at $3,149. A break above this level could signal renewed bullish momentum, potentially leading to a retest of the record high at $3,167. If bullish momentum persists, the next target is the $3,200 psychological barrier, which could pave the way for further gains. Despite the recent pullback, the broader trend remains bullish, with dips likely to be viewed as buying opportunities.   Looking Ahead: Non-Farm Payrolls and Fed Policy Traders are closely monitoring Friday’s US non-farm payrolls (NFP) report, which could provide critical insights into the Federal Reserve’s next policy moves. A weaker-than-expected jobs report may strengthen expectations for an interest rate cut, further boosting gold prices.   Other key economic data releases, such as jobless claims and the ISM Services PMI, may also impact market sentiment in the short term. However, with rising geopolitical uncertainties, trade tensions, and a weakening US dollar, gold’s safe-haven appeal remains strong.   Conclusion: While short-term profit-taking may trigger minor corrections, gold’s long-term outlook remains bullish. As global trade tensions mount and the Federal Reserve leans toward a more accommodative stance, gold could see further gains in the months ahead.   Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Andria Pichidi HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • AMZN Amazon stock, nice buying at the 187.26 triple+ support area at https://stockconsultant.com/?AMZN
    • DELL Dell Technologies stock, good day moving higher off the 90.99 double support area, from Stocks to Watch at https://stockconsultant.com/?DELL
    • MCK Mckesson stock, nice trend and continuation breakout at https://stockconsultant.com/?MCK
    • lmfx just officially launched their own LMGX token, Im planning to grab a couple of hundred and maybe have the option to stake them. 
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.