The ES emini Future contract has a 1-to-1 pricing relationship with SPY ETF. When SPY is 94.00, the ES should be around 940.00 (a factor of 10). But when makes the ES and the SPY stay close together? Suppose the market closes on Friday and the SPY is 94.00 at the close, the ES continues to trade over the weekend. The ES price could go as high as 120.00 and as low as 80.00, for example. Eventually, the ES will be close to 940.00 again when the market opens for equities on Monday. Again, what causes the ES to eventually be close to SPY by the time the market opens on Monday?
SPY has a close relationship to the S&P 500 cash index (SPX), which is obviously closely related to the ES. However, the ES doesn't have to go back to SPY Friday's close when it opens on Monday. SPX and ES are kept closely together by the arbitrage and so is SPY when it's trading.
That's an improper assumption. The ES and SPY will be "in line" with each other but the market can still open much higher or lower. The ES does not have to be at ~940.00.
Ok, arbitrage keeps ES and SPX close together. In general, the futures price tends to move first, creating price inefficiencies in the cash market which the arbitrage programs try to exploit. But, when SPY is not trading, then the SPX's value is not available, so during the weekend or non-market hours, arbitrage programs are not able to function. In that case... What if ES is 20 points away from SPX, I could enter a trade in the direction of the gap, arbitrage will eventually close the gap when the SPX value becomes available again when the market opens. Or no?
You really are naive, aren't you!? First of all, SPY is an ETF that follows the SPX so the value of SPX is not conditional on SPY's trading! And secondly, there is absolutely no reason for the ES to trade close to the SPX when it's closed. Once the stock market closes the flow of information doesn't stop so the ES reflects any and all of this information, which is then also gets reflected in the stocks and hence the SPX, when the market opens. In other words, the gap, which you can see reported premarket all over the place - futures are X points above/below fair value - is not a gap that just happened to develop because there is no arbitrage, but because market expectations have changed.
The value of SPX is changing during overnight market hours? Interesting, according to my thinkorswim chart, the value of SPX doesn't change during the overnight market hours.
Obviously it doesn't change, but the information that impacts the stocks and hence the SPX flows constantly, hence by the time the stocks open the next day, the prices change. In other words, you don't seem to grasp the point that the world doesn't stop when the US stocks close and whatever happens in the world impacts the stock prices.
You know what...I give up! I obviously cannot explain this to you in a way you can understand. If you think you have found the holy grail then go for it! Over and out!
kind of related to this old thread.... is there an OTC swap market, maybe and EFP-type market, between the SPY and emini future? if so, how would the broker arrive at value (maybe theoretical value of futures minus SPY)? i've searched around and even contacted a few equity derivatives desks, but no response. thanks