An Institutional "Look" at the S&P Futures

[jim380 10]

Steve,

 

Does the cash market leads the futures market or is it the opposite? Does these big players play on both sides? My thoughts is these market movers cannot just manipulate the ES without considering the SP500 stocks. Or can they; if the push up the ES, other players will buy up the cash market? How does it work?

[steve46 12]

Steve,

 

Does the cash market leads the futures market or is it the opposite? Does these big players play on both sides? My thoughts is these market movers cannot just manipulate the ES without considering the SP500 stocks. Or can they; if the push up the ES, other players will buy up the cash market? How does it work?

 

The "academic" papers suggest that there is "strong evidence" that futures lead, however it seems to me that it depends on the nature of the information that moves the market, whether it is general (about the world at large) or specific (about a single company or stock) and WHEN the information reaches the market. As an example, the news of the bailout of the Irish bank system was general information that hit the market during Globex session, when the US market was closed. As a result it was the overseas futures and the US Globex markets that reacted first, then when the US market opened, we saw the impact of that news on the cash market as well.

 

If you want to explore the subject in detail you may also want to research the related subjects of "carry" or "cost of carry" and "arbitrage"...

 

As an aside, there are many approaches to using both cash and futures for hedging risk and generating profit based on small inefficiencies between the markets. Most of these approaches require technologies that aren't available to the public or are too costly for individuals to implement. Some are technically demanding and require programming skills that most retail traders simply do not possess. This is a complex subject, and although I have a broad understanding of it, I don't have the expertise necessary to offer much more detail.

 

One thing that may help you in terms of a general understanding is the simple concept of wholesale/retail similar to what your department store does where you live. I would suggest to you that if we set aside the technical details, all participants look to do the same thing, and that is to buy "inventory", be it shares of stock, debt, or futures contracts, at wholesales prices, and at some point, sell that product at retail prices, presumably for a profit. If you really look at what that means, you will not be surprised when I say that for the most part, I don't get involved at all until the markets reach an extreme (a significant swing high or low). When I see that or when I see the markets reach a price that by my metrics seems to be unusually high or low, I act to take advantage of what I see as mispricing of that asset by buying or selling and holding until it reaches my target price.

 

 

 

I hope this is of some help

Edited November 30, 2010 by steve46

[steve46 12]

I post this chart in reference to my previous comment about the practice called "stealing the trade"...Simply put this is where participants decide to mark the markets up during the Globex period (the overnight market for US, which starts at 1330 hours or 1:30 PST, extending until right before the US open at 0630 hours or 6:30 PST)

 

The information important to traders is simple. If you can identify these potential "mark-up" dates in advance, you have the opportunity to simply get on board and watch as others do the work of moving it up (to meet their profit targets). If you look at the range, you can see that it is about twice what the intraday RTH is....30pts vs about 15 during regular trade hours (RTH)

[steve46 12]

and this second chart is simply a closer view of the time period directly at the close of RTH (regular trading hours) and into the Globex or overnight market.

 

I have marked the open of the Nikkei and HangSeng (Futures) markets. In both cases these markets serve as the backdrop for a nice move up. In fact the 2nd session of ther Hang Seng provides a nice retrace and test of the Globex low from which a trader could have got on board and simply monitored their position the rest of the evening.

 

Of course this is interesting in light of the comment posted by members who thought it funny or dubious that a market would be marked up as US traders slept....I can appreciate a good joke myself, and am going to get some sleep now that my work "day" is over....

[steve46 12]

This will be the final chart in the series showing the whole move including today's regular trading hours session move of 15 points.

 

Put in perspective you have a nice move with a minimum of pullback. A trader could have simply put on an options position and watched or traded the futures outright long, taking profits periodically. Personally I prefer to get on early and watch..

 

Best of luck to all

[steve46 12]

Here is a chart showing today's open, the placement of supply and demand at the extremes of a local distribution and a possible short opportunity.

 

The idea is simple. In order to make a dollar in this business you need to prepare in a logical fashion. You begin by identifying the extremes of a local distribution. Most of the time this is the local high and low. You then identify supply and demand. These are areas where an imbalance exists (or more properly "has existed"). You look at how price leaves those areas for a clue as to how price is likely to move on the open....

 

As you can see I have identified the opening (horizontal lines) half hour time period. I believe this is a critical time period. In this instance I would want to get short either above or as close to the top of that period as possible (and vice versa for a long position).

 

and now the price action. As you can see price opened and tested the high. This happens all the time....knowing this you prepare for a test of the high and on the failure you have plenty of time (and several places on the chart) to short the market.

 

I show a preliminary profit target and the secondary target is demand near the bottom of the chart. If it works, it works, if not, you move on to the next opportunity.

Edited December 6, 2010 by steve46

[steve46 12]

Here is a follow up to the previous post, showing the short position's progress. As can be seen this short would have hit the first profit target.

[steve46 12]

Okay so that first short entry came within a tick of a 10 point profit before reversing

 

and in the attached chart, you can see how price "telegraphs" the change as this market goes from short bias to long bias (just my opinion). From my point of view the important thing to note is that it happens just prior to the open of the US market. This is a common occurrence as professionals look to position themselves PRIOR to the open, and at wholesale prices if possible (the low of that reversal bar/candle is at 1216.25 which most professionals would define as "wholesale level demand" for this distribution).

[suckassjuice 10]

Okay, so I will answer this one with one example chart.

 

The DAX market in Germany opens and the time is 11:00pm on the west coast USA, (2am on the East Coast USA) and if you look at the chart you can see that if they decide to mark that market up or down, the bulk of the move takes place throughout the night. I think its fair to assume that the majority of folks living in the continental USA are asleep at this time. Also if you were to look at either a DOM or a Time & Sales Strip for the ES contract, you would see that it is "shallow", that is to say there less volume transacting on the Globex during this period, and yet it moves for the most part in lockstep with the DAX....

 

Frankly I don't know of a simpler way to explain this...

 

Your explanation is more than simple. It's actually simplistic and sorely lacking insight given your prior post claiming "One way of accomplishing that is to move markets (S&P) north in the overnight, when a lot of folks are sleeping." It's as if you believe that mischief happens when (some) people aren't paying attention (sleeping). You seem to believe the S&P is always the leader whenever it's open for trading. Wrong. It's only a leader for all practical purposes one time during a 24-hr span (basically from 8a - 4p ET). During the open of global trading on Sunday, the S&P is nothing more than a follower of the Asian markets. Then it plays second fiddle to the European markets. Finally, it closes out the global trading day and the whole process starts over again. So, when the European markets are open, it's those markets that will determine if the S&P moves up or down. It has nothing to do with anybody being asleep. There isn't some cabal conspiring in the wee US hours "accomplishing" desired movements of the S&P.

 

And actually, no, the Dax market doesn't open at 11p PST. I thought you said you're a trader with a European desk? I find it quite remarkable that you don't even know when the German market really opens.

[MightyMouse 12]

Your explanation is more than simple. It's actually simplistic and sorely lacking insight given your prior post claiming "One way of accomplishing that is to move markets (S&P) north in the overnight, when a lot of folks are sleeping." It's as if you believe that mischief happens when (some) people aren't paying attention (sleeping). You seem to believe the S&P is always the leader whenever it's open for trading. Wrong. It's only a leader for all practical purposes one time during a 24-hr span (basically from 8a - 4p ET). During the open of global trading on Sunday, the S&P is nothing more than a follower of the Asian markets. Then it plays second fiddle to the European markets. Finally, it closes out the global trading day and the whole process starts over again. So, when the European markets are open, it's those markets that will determine if the S&P moves up or down. It has nothing to do with anybody being asleep. There isn't some cabal conspiring in the wee US hours "accomplishing" desired movements of the S&P.

 

And actually, no, the Dax market doesn't open at 11p PST. I thought you said you're a trader with a European desk? I find it quite remarkable that you don't even know when the German market really opens.

 

There is an arbitrage relationship between the S&P and all other world stock indices. At any time of the 24 hour day, the one with the most volume at that time leads the others.

[suckassjuice 10]

There is an arbitrage relationship between the S&P and all other world stock indices. At any time of the 24 hour day, the one with the most volume at that time leads the others.

 

And while the Asian markets are open, they have the most volume until the European markets open. Then the power shifts to them; all the while the S&P's typically are just following along. There's nothing magical about it. There's no one sitting around "marking up/down" S&P prices. I spread trade HK futures, Dax futures and US futures (and, yes. I've even contemplated trading the Aussie market just to round it out). I watch this dance over and over again...day after day.

[steve46 12]

I guess the question to be answered is do I have enough time to correct all the useless urban myth that you two have posted?

 

and do I care? I would say the answer is no...So my comment is simply, between the misinformation, the bullshit attitude, and the useless crap....I wouldn't know where to start....

 

I will be ignoring you completely....I would suggest others do the same...

Edited December 8, 2010 by steve46

[MightyMouse 12]

I guess the question to be answered is do I have enough time to correct all the useless urban myth that you two have posted?

 

and do I care? I would say the answer is no...So my comment is simply, between the misinformation, the bullshit attitude, and the useless crap....I wouldn't know where to start....

 

I will be ignoring you completely....I would suggest others do the same...

 

I sense a sharp streak of anger at the input of others. Did you say which institution you are in?

[Trendup_ 10]

I guess the question to be answered is do I have enough time to correct all the useless urban myth that you two have posted?

and do I care? I would say the answer is no...So my comment is simply, between the misinformation, the bullshit attitude, and the useless crap....I wouldn't know where to start....

I will be ignoring you completely....I would suggest others do the same...

 

 

Just to let you know that I enjoy your posts, keep them coming .

Cheers

[suckassjuice 10]

Come on, Steve. At least let every one know that you have the capacity to figure out when the Dax opens for trading.

[BlowFish 10]

There is an arbitrage relationship between the S&P and all other world stock indices. At any time of the 24 hour day, the one with the most volume at that time leads the others.

 

If it was that simple trading would be trivially simple. My observations actually suggest the reverse, illiquid correlated instruments tend to move faster and further than their heavy weight brothers, a bit like flies on an elephant.

 

The "arbitrage relationship between the S&P and all other world stock indicies" is not great despite them being correlated. Convergence is likely to be slow, if it occurs at all (one of the bigger risks of arbitrage). Also the arbitrage relationship is non stationary for example it is not hard to see that changes in underlying currency exchange rates are going to have a large effect on any arbitrage opportunity,

[steve46 12]

Blowfish

 

Thanks...at least one item of comment that I can respond to...

We do a lot of whats called "cross border" spreads in my group. I see you are already clear about the requirements for correllation and convergence, so I would simply add that to make it work, we have to monitor intraday correllation from 1 min to 60 min time periods. For folks new to this, what we want is to see are significant "waves" or patterns of change in relative valuation above and beyond what is termed statistically "trivial"....If/when we find that relationship with a pair, we trade it. There are other issues relating to notional value (for contracts denominated in different currencies), to currency volatility, and although there's no expicit gamma, to the "appearance" of it from time to time in the position. Like most things in life, there are people who do this very well and others who think they do, and end up being some bigger fish's lunch.

 

Best of luck to you

[MightyMouse 12]

If it was that simple trading would be trivially simple. My observations actually suggest the reverse, illiquid correlated instruments tend to move faster and further than their heavy weight brothers, a bit like flies on an elephant.

 

The "arbitrage relationship between the S&P and all other world stock indicies" is not great despite them being correlated. Convergence is likely to be slow, if it occurs at all (one of the bigger risks of arbitrage). Also the arbitrage relationship is non stationary for example it is not hard to see that changes in underlying currency exchange rates are going to have a large effect on any arbitrage opportunity,

 

Its never simple and its never perfect. However, their markets go up in reaction to ours and visa versa.

 

If the market that is open rallies because of some event. It is a very rare instance when the the others do not immediately adjust. It is so rare that we can safely say it is nonexistent.

[BlowFish 10]

Its never simple and its never perfect. However, their markets go up in reaction to ours and visa versa.

 

If the market that is open rallies because of some event. It is a very rare instance when the the others do not immediately adjust. It is so rare that we can safely say it is nonexistent.

 

Indeed, however originally you suggested one could look at volume to determine the 'leader'. Arbitrage is a complicated business with several variables.

 

Again being devils advocate I would argue that it is just as likely that the market that has moved has moved away from 'value' and will return to the others. An arbitrager would not care which scenario occurs as they would be short the the market that had risen and long the markets that had not. They only loose if something fundamentally has changed and the divergence continues.

 

As an it is interesting to plot the relative strength of a pair of markets (like the ES and YM for example) its interesting how far and how long out of line things can get.

[BlowFish 10]

I should add that there is a point to my pedantic bickering and that is this.....it is not a trivial matter to find an exploitable edge based on market A leading market B. What does seem to happen is that you spot something that appears extremely reliable for days or even a week or two and then bang the relationship just disappears or even reverses. I am always sceptical when people say the YM leads the S&P or the S&P leads bonds (inversely) or the US leads the EU during the NY morning. I think you need to be pretty fleet of foot and quite sophisticated to utilize these phenomena.

[steve46 12]

Okay so we can see now if/how people are thinking about this.

 

Blowfish, the reason I posted that we look at intraday cor/convergence on multiple time frames is precisely because of what you just observed. The relationship that we look for can (and does) appear periodically and then disppears, at least thats how it looks to most participants....Actually what we find is that the tradeable relationship "cycles" in and out of existence depending on several factors (one of which is stationarity). So what we (and many others) try to do is determine what the cyclical nature of that occurence is....for the various spreads.

 

As I mentioned in a prior post, there is an equivalence to time and price, that can be exploited.

[steve46 12]

Just to let you know that I enjoy your posts, keep them coming .

Cheers

 

Its nice of you to say so,

 

Good luck in the markets

[steve46 12]

Here is an anotated chart showing the ES contract from the Globex open, to the open of the Asian Markets (the mark down phase), followed by the DAX open (and the mark up phase) and the US open. Note that that US opens, probes down past the weekly open, finds no sellers and then the rest of the day is uneventful as we grind up into the end of day balloon.

 

If you can read the tape, the open is a walk in the park. Why? Because if you prepare by referring to the larger time frame (see the next attached chart) you know that price is likely to test previous demand (support). The actual process consists of two steps. Step one is you see the possibility of a retrace and test of a level. Step two is you read the tape when price tests that level and you react to what the tape shows you..In this case we saw price test and bounce. If you handled it correctly the rest of the day consisted of risk management.

 

A couple of final comments to put things in perspective. Off the open, we had plenty of opportunity, if you wanted to get short

it was there for you (see the third chart) when price tested supply. On the move down, again you had plenty of opportunity if you recognized where the demand was (look at the "buying tail" notated at the bottom of that chart). Everything in trading is about recognition. You have a limited amount of time in which to recognize opportunity and to act.

Edited December 8, 2010 by steve46

[Kiwi 16]

I will add that I enjoy your posts Steve and the thought processes you stimulate.

 

I also enjoy the detractors though because the debate seems to reveal even more of interest. Then again, I still enjoy elements of ET.

[MidKnight 12]

Come on, Steve. At least let every one know that you have the capacity to figure out when the Dax opens for trading.

 

Stop being a dick - OK. This isn't ET. While you may not agree with this thread, there is no need for you to create tension through useless posts like above.

Edited December 9, 2010 by MidKnight