The chicken or the egg?

franjewy

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The S&P 500 Index tracks 500 stocks. SPY tracks the index. The e-mini S&P trades almost around the clock. When the ES trades lower before 9.30AM, the Index and SPY open with a gap down. But aren't the futures supposed to track the stocks?

Can anyone clarify which tracks which?

In the same line, what happens if, say, investor demand is strong for the 30 stocks components of the DOW, but demand is weak for the YM futures? Does the YM move on its own supply/demand forces, or is the supply/demand irrelevant because the futures will move to track the DOW?

Thanks for any help.
 
Futurer track the stocks when activity is in stocks and stocks track the futures when activity is in futures. This is caused by arbitrage. The fancy technical term is 'price discovery'.

The short answer is that tracking error is minimized by arbitrage.
 
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