Indices like the HSI or other european stock indexes can open with significant gaps. The DJI on the other side tend to open close to the previous day's close. Is this because the DJI index uses previous days' close for those stocks that haven't traded yet on the open ? Thank you. (in case this isn't obvious, I have never traded any us products).
More or less. The index reflects the stocks "as they open", so concept of gap really doesn't apply (SPX is the same). If you're interested in the DJs gaps, watch the DIA.
Okay, thank you. Is there a fundamental reason why the DowJones and S&P500 indexes work this way as opposed to the HSI ? (sorry I'm in Asia and dont know much except about the HSI for stock indexes). Or is it just the way the rules were established on day one without real fundamental reason behind ?
Don't know of any logical reason.... maybe it just started out that way and never changed. Nasdaq came along later.. maybe they thought reflecting the opening gap would be a good idea, and so it does.
Thank you. In your opinion, does it really matter whether an index has this mechanism ? The reason why I'm asking is because I am in the credit market which is essentially a gap market, with no real way to hedge those gaps (well as far as I am aware of, of course). I would tend to think that in reality there is no difference. Let me explain what prompts my initial question. The day of the big drop in the DJI, when was that, 2 days ago ? The DJI opened flat and immediatly collapsed. I thought, man if this was the iTraxx index I would shoot the first bid. But obviously it cant be that simple. Watching what the DJI futures do on the opening may answer my question may be. I wouldnt be surprised if the futures open with this big gap as opposed to the cash index ?