Trouble Understanding What Moves Futures Mkt and its Relationship with Spot Mkt

[powerbook]

Hi,

Take the Dow, is the spot market king?

Or is it speculation in the futures market that cause both to rise?

I see the pre-market news reports such as "Dow futures up, Market set to open higher".

I am new to the US but to they have pre-market RNS like we do, where at 7am company results usually come out?

Are the Dow futures therefore "up" because of good economic data?

I am having trouble understanding which is the dog, which is the tail and who wags who.

And does the relationship change on say days with little or no company announcements. Would the futures market be king and arbitrageurs coming in to the market market to even it up?

Help!

Many thanks for any advice for this novice.

 

[Racer]

Fair value

In the futures market, fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest (and dividends lost because the investor owns the futures contract rather than the physical stocks) over a certain period of time.

The "fair value" quoted on TV refers to the relationship between the futures contract on a market index and the actual value of the index. If the futures are above fair value then traders are betting the market index will go higher, the opposite is true if futures are below fair value.

 

[Strategic Trader]

the futures always lead the cash - since major stock trades are front run in the futures index market

the comment - "Dow futures up, Market set to open higher".- is to do with the prior day close compared with the current days futures price

if you are new to trading - you would want to forget about the cash price and just concentrate on the futures price - and definetly ignore any news reports

 

[peterpr]

Hi,
Take the Dow, is the spot market king?

No. The 'DJIA spot market' isn't a market at all. The term refers to the quotes offered by hundreds of different companies on their own derivative of the index proper. The biggest single influence on those quotes is the index futures price. The spot quote providers continuously hedge - or offset - their spot book net positions in the futures market. They are just one class of large futures player. There are many others.

Or is it speculation in the futures market that cause both to rise?

The primary rationale for the existence of futures is not 'speculation' - as commonly understood anyway. It is to hedge risk in the underlying main market. You need to understand who the principle players in a futures market are, together with their motivations, to get a handle on how the price of a futures contract and the underlying main market affect each other. Be warned, it is a complex subject.

Racer's 'fair value' explanation is an illustrative case in point. No matter what a futures trader thinks its maturity price will be, the fact remains that If the index and futures prices deviate by more than 'fair value', then an arbitrage opportunity arises (ie a risk-free trading opportunity based on simultaneous opposite trades in the both markets). There is another class of futures trader who does little other than seek to exploit such opportunities and since small deviations require large trades to make a worthwhile (risk-free) profit, their participation can be market moving. That is why a futures price emphatically does NOT represent a consensus view of what the index value will be at the maturity date - in fact it says nothing about it at all.

There are a host of other complexities and no simple trite explanations I'm afraid.

 

[powerbook]

Many thanks.

 

[-oo0(GoldTrader)]

Jimmy Olson follows Superman

Hybrid Thread

The only thing that can make prices go up is buying.

Are … futures therefore "up" because of good economic data?

News follows price. Price moves, non-trading Journalists make up why.

 

[FetteredChinos]

Hybrid Thread

The only thing that can make prices go up is buying. News follows price. Price moves, non-trading Journalists make up why.

here we go again..

1) not necessarily true.. how about an absence of sellers? simple supply/demand analysis means that prices rise as fewer sellers are on the market

2) how about economic news, wars etc? may i refer the honourable gentleman to march 03?

fc

 

[rog1111]

powerbook

unfortunately there are no easy shortcuts, and you'll have lots of homework to do. However I'd strongly advise you not to lose track of the underlying index/stocks prices when looking at this. It's easy to simply look at the futures prices and think you are seeing enough to trade successfully. Not so, IMHO.

good luck, and keep studying

rog1111

 

[powerbook]

Thanks all.

Any idea what the rough % is for market participants in the futures mkt, hedgers, speculators etc.

 

[-oo0(GoldTrader)]

Clark Kent

Hybrid Thread

What happened March 03?

Sure there are exceptions. But what happens is Superman does something (price moves). Then the Chief tells Jimmy Olsen to go out there and find out what made the market move. He publishes some garbage and all the little children repeat it as if Jimmy even had a clue. It is the purpose of the press to sell securities to the public. Price moves first, then they try to rationalize it in the direction of trend. The only thing that can make prices go up is buying.

here we go again..

1) not necessarily true.. how about an absence of sellers?

Absence of sellers, without buying prices go down.

2) how about economic news, wars etc?

Ever been in a war?

Prices move as general’s line up and ship their troops around the world. The price of gold can see it a long way off. The people about to make the decisions move into stronger currencies. Food, materials, supplies have to be lined up before the event,

may I refer the honorable gentleman to march 03?

 

[FetteredChinos]

again. not true..

prices are decided by the MM's

even if there was no buying, they can offer higher prices. no obligation to buy remember..

 

[peterpr]

Sure there are exceptions. But what happens is Superman does something (price moves). Then the Chief tells Jimmy Olsen to go out there and find out what made the market move. He publishes some garbage and all the little children repeat it as if Jimmy even had a clue. It is the purpose of the press to sell securities to the public. Price moves first, then they try to rationalize it in the direction of trend. The only thing that can make prices go up is buying.Absence of sellers, without buying prices go down.

There's more to 'news' than the financial cheerleading variety which you caricature so accurately though.

Here's a simple example of how real, run of the mill news DOES move markets (there are plenty of others):

A major economic economic number is to be announced tomorrow; the market has a consensus view of what it will be. If the consensus turns out to be there or thereabouts - barely a ripple; if it is double or half consensus then hang onto your hat. The market WILL REACT to the news - not the other way around.