buy market in futures = buy at whatever the ask is. If you buy 1000 ES futures above fair value, an arbitrager can come in and buy the underlying basket of S&P stocks until its value equals the 1000 ES he sold to you. futures are merely agreements between the buyer and seller where the winner pays the loser. the exchange acts as a middleman and takes care of this guarantee (loser pays exchange, exchange pays winner.. and vice versa). in stocks, yes there are supply issues - but in most cases large floats make the differences more academic discussions than practical ones. price is determined in both cases by the buyer and seller, sometimes the market maker (in stocks sometime), sometimes not (in stocks after hours or if you put a limit order more competitive than the MM or specialists bid/ask). by the way, altho there is no market maker in futures markets, they go by a different name (and usually offer less competitive price) - arbitrager.
i guess the real question is, how does globex create a bid and ask prices? So if there is no market maker but there are arbitrager... are they forced to bring the spot and futures price together (are they hired to do this)? I was reading this up on investopedia.com http://www.investopedia.com/ask/answers/06/futuresconvergespot.asp it says Why do futures' prices converge upon spot prices during the delivery month? It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch toward or even come to equal the spot price as time progresses. This is a very strong trend that happens regardless of the contract's underlying asset. This convergence can be easily explained by arbitrage and the law of supply and demand. For example, suppose the futures contract for corn is priced higher than the spot price as time approaches the contract's month of delivery. In this situation, traders will have the arbitrage opportunity of shorting futures contracts, buying the underlying asset and then making delivery. In this situation, the trader locks in profit because the amount of money received by shorting the contracts already exceeds the amount spent buying the underlying asset to cover the position. I did not quite understand the last sentence... "In this situation, the trader locks in profit because the amount of money received by shorting the contracts already exceeds the amount spent buying the underlying asset to cover the position."
you are correct. when there are more buyers than seller, the price will momentarily goes up above "fair value". The arbitrageur will step in to return the price to equilibrium. http://en.wikipedia.org/wiki/Arbitrage
Globex doesn't "create bid and ask prices", they only display current bids and offers.... which are limit prices from other investors. If you want to buy, you can either set a limit price or buy "at the market"... in which case you're taking the currently lowest offered price.
Perhaps the vision of a cattle auction will enlighten. The auctioneer being the posted prices on globex.
by the willing seller who wants to sell it at that price at that time. edit: if there were no willing sellers, there would be no offer quoted.
but how does a bid and ask price get created if there are unlimited supply of contracts that can be created... it's not like stocks where there is a limited supply which causes the round of stock prices to move up starting with the lowest priced stock.
a willing buyer will assess the market potential, and enters a willing bid through his broker, a willing seller will assess the market potential, and enters a willing offer through his broker. If the bid price and the offer price matches, a contract is created.