Sunday debate

[sighthound]

I thought that was obvious you amateurs

 

[MrGecko]

can happen in the NASDAQ, apple is a whopping 20% of NASDAQ index.

I didn't know that.

The Dax example I was shown had I think 3 or 4 stocks with together made up over 30% of the index... and the Dax only has 30 stocks total.

 

[timsk]

timsk.

here we have s&p500 cash spliced with ES futures, tick, vertical lines highlighting where the ES moves before the cash. random segment from friday, will do the same for any time peroid you like if you dont accept this as solid proof.

are we done here?

god damn i love bloomberg.

(there are 2 occasions the cash moves first, compared to the ES's 6.)

Hi Roth,
Thank you for the excellent chart and the explanation. I agree with you 100%! Yep, you read that right. However, we've been talking at cross purposes, for which I apologise if I've not made my position clear. Futures do indeed tend to lead the cash index, as your chart clearly shows. For the benefit of clarette and others, I do make this very point when I have my official T2W hat on. For example, please see the section headed 'Cash & Futures' in the 'Essentials of Indices' Sticky. However, this isn't my point. My point is that participation in buying or selling equities is evident in the NYSE Tick first. This is a very different kettle of fish to the cash index and the two should not be confused. Clearly, the Tick has to 'tick' up or down before any net movement can be registered on the cash index, be it the s&P 500 or the DJIA - or whatever. So, I'm saying that the order of play goes like this: Tick > SP > ES > Cash.
Tim.
P.S. I'm a tad disappointed Roth' that you think I deleted clarette's post because I disagreed with it. Clearly you don't know me very well or understand how T2W works!

 

[wackypete2]

That's a lotta apples!

Peter

 

[barjon]

well, that was a nice sunday then

 

[MrGecko]

Hi Roth,
I'm saying that the order of play goes like this: Tick > SP > ES > Cash.

I am not in a position to disagree with this because I don't watch closely enough (not at all in terms of Cash and Tick). However, it doesn't seem to make sense:

The Index is just a calculation. It's only lag behind the component stock prices should be the time it takes to compute. The index isn't something you can buy/sell, only the futures or a basket of stocks you can buy/sell.

The fair value of the futures is also just a calculation, but traded price can deviate from fair value. Moreover, the ES should faster to react to a change in the SPX than the SP, because computers are faster than humans.

I also don't think it can be as clear cut as some of you are saying. In some circumstances, there will be buy/sell programs running in the underlying stocks, which will in turn push up the index and subsequently the futures.

Another circumstance would be where large deals need to be done quickly; market participants will go to the futures first, raising the indicitave cash index price - causing arbitragers to start buying Stocks and raising the index (and selling the futures, reducing the indicative cash index, until the two align).

Call me a cync, but I can't think of anything that is always true in the markets.

 

[N Rothschild]

I am not in a position to disagree with this because I don't watch closely enough (not at all in terms of Cash and Tick). However, it doesn't seem to make sense:

The Index is just a calculation. It's only lag behind the component stock prices should be the time it takes to compute. The index isn't something you can buy/sell, only the futures or a basket of stocks you can buy/sell.

The fair value of the futures is also just a calculation, but traded price can deviate from fair value. Moreover, the ES should faster to react to a change in the SPX than the SP, because computers are faster than humans.

I also don't think it can be as clear cut as some of you are saying. In some circumstances, there will be buy/sell programs running in the underlying stocks, which will in turn push up the index and subsequently the futures.

Another circumstance would be where large deals need to be done quickly; market participants will go to the futures first, raising the indicitave cash index price - causing arbitragers to start buying Stocks and raising the index (and selling the futures, reducing the indicative cash index, until the two align).

Call me a cync, but I can't think of anything that is always true in the markets.

of course cash can and does lead the futures but the majority of the time its futures first.

 

[wackypete2]

The Index is just a calculation.

This is where you are having some trouble. Yes, it's a calculation but it can be manipulated. If you can buy/sell the index (or the futures) you CAN effect what the equities do based on the supply or demand of the index or futures. NRothschild has shown a few simple side by side charts that are revealing.

If Goldman Sachs wants to keep the nasdaq market depressed for whatever reasons all it has to do it sell the futures very aggressively, which will then drop in price. The stocks in the index will follow accordingly.

Peter

 

[N Rothschild]

This is where you are having some trouble. Yes, it's a calculation but it can be manipulated. If you can buy/sell the index (or the futures) you CAN effect what the equities do based on the supply or demand of the index or futures. NRothschild has shown a few simple side by side charts that are revealing.

If Goldman Sachs wants to keep the nasdaq market depressed for whatever reasons all it has to do it sell the futures very aggressively, which will then drop in price. The stocks in the index will follow accordingly.

Peter

potentially but you could run into all sorts of problems doing that! you cant artificially depress a market for to long, eventually it WILL go higher.

 

[spinola]

hmm with FX I thought it was the Spot market that lead, and the futures have lagging gaps all over them ? But it's has been a while since I observed this on a chart....... I mean not looked recently

 

[N Rothschild]

hmm with FX I thought it was the Spot market that lead, and the futures have lagging gaps all over them ? But it's has been a while since I observed this on a chart....... I mean not looked recently

fx is a totaly different kettle of fish!

 

[wackypete2]

potentially but you could run into all sorts of problems doing that! you cant artificially depress a market for to long, eventually it WILL go higher.

Not me! I don't have that kind of buying power!
But yes, I agree. It was just an example.

Peter

 

[spinola]

fx is a totaly different kettle of fish!

Okie doke , cheers.

 

[MrGecko]

This is where you are having some trouble. Yes, it's a calculation but it can be manipulated. If you can buy/sell the index (or the futures) you CAN effect what the equities do based on the supply or demand of the index or futures. NRothschild has shown a few simple side by side charts that are revealing.

If Goldman Sachs wants to keep the nasdaq market depressed for whatever reasons all it has to do it sell the futures very aggressively, which will then drop in price. The stocks in the index will follow accordingly.

Peter

You can't sell an index, it is the result of a calculation - you can only sell a basket of the underlying stocks or the futures.

An index will tell you what the result of a sum is at any point in time. Buying or selling takes place in other markets and in turn impacts the index... my point is that it isn't always the futures or always the stocks first.

I do agree with Rothschild about the futures leading more often than not, because of the liquidity issues and EFP issues mentioned earlier.

 

[timsk]

I also don't think it can be as clear cut as some of you are saying. In some circumstances, there will be buy/sell programs running in the underlying stocks, which will in turn push up the index and subsequently the futures.

Hi MrG',
This is precisely my point, and where will the buy/sell programmes initiated by the big commercial players show up first? In the NYSE Tick. It's a physical impossibility for the cart to lead the horse. With the exception of the Tick / cash index relationship, I would stress that I'm talking in general terms and I'm not trying to paint a black and white picture. Obviously, if it was as simple and clear cut as 1 > 2 > 3, we'd all watch to see what No.1 does and then trade No. 3 accordingly. Sadly, (for me anyway) it's not that easy!
Tim.

 

[sighthound]

This is a newb question, so can the market makers control an index to a degree basically rendering any fundemental news of a particular stock useless.

 

[N Rothschild]

This is a newb question, so can the market makers control an index to a degree basically rendering any fundemental news of a particular stock useless.

no because the amount of selling/buying would overwhelm them. remember there are position limits in the futures.

 

[wackypete2]

Hi MrG',
This is precisely my point, and where will the buy/sell programmes initiated by the big commercial players show up first? In the NYSE Tick. It's a physical impossibility for the cart to lead the horse. With the exception of the Tick / cash index relationship, I would stress that I'm talking in general terms and I'm not trying to paint a black and white picture. Obviously, if it was as simple and clear cut as 1 > 2 > 3, we'd all watch to see what No.1 does and then trade No. 3 accordingly. Sadly, (for me anyway) it's not that easy!
Tim.

Agreed.
If it was that easy everyone could do it.

Peter

 

[N Rothschild]

Hi MrG',
This is precisely my point, and where will the buy/sell programmes initiated by the big commercial players show up first? In the NYSE Tick. It's a physical impossibility for the cart to lead the horse. With the exception of the Tick / cash index relationship, I would stress that I'm talking in general terms and I'm not trying to paint a black and white picture. Obviously, if it was as simple and clear cut as 1 > 2 > 3, we'd all watch to see what No.1 does and then trade No. 3 accordingly. Sadly, (for me anyway) it's not that easy!
Tim.

again disagree. you could easily clip 5,000 minis with in a few ticks.

5,000 mini's equates to 50 million shares in citi. the BIG money will go to the futures for a speculative directional play every day of the week. i think you are a bit misguided in how liquidity etc works and how money goes to work.

 

[MrGecko]

Hi MrG',
This is precisely my point, and where will the buy/sell programmes initiated by the big commercial players show up first? In the NYSE Tick. It's a physical impossibility for the cart to lead the horse. With the exception of the Tick / cash index relationship, I would stress that I'm talking in general terms and I'm not trying to paint a black and white picture. Obviously, if it was as simple and clear cut as 1 > 2 > 3, we'd all watch to see what No.1 does and then trade No. 3 accordingly. Sadly, (for me anyway) it's not that easy!
Tim.

But couldn't the buying you are seeing in the Tick be a response to buying in the future that raised the indicative cash index value (thereby leaving equities under-valued)?

I mean, we have two arbitrage-style-arguments here - one with the index and the underlying stocks (your argument Tim), and another between the futures and the indicative cash index.

Let's say that the two arguments are equal, that the value of the future and the value of the underlying stocks affect each other (via the index) in equal amounts. The next stage is to ask about the practicalities of it in real life - if you have a pension fund asking you to sell $50mm of teh sp500, do you either:

a) Set an algo to work on teh 500 stocks in the correct amounts, or
b) hit teh bid for 909 lots?

It's b), and that is what's behind Rothshchilds graphic IMO.