Posted on 06/29/2004 7:27:51 AM PDT by TigerLikesRooster
Arbitrage trading (a kind of programmed trading) between the futures markets and the cash markets (NYSE, NASDAQ, AMEX, etc) via ETF's (Exchange Traded Funds namely DIAs, SPDRs, QQQs, and their smaller E-mini counterparts) bring both futures and cash markets into mutual 'fair value' within minutes of one market or the other moving outside fair value (a narrow spread between the two).
It works both ways. A large move in the cash markets can move the futures markets, but the leverage in the futures markets is much greater and typically a move started in the futures will bring a commensurate move in the cash markets.
When one of a series of **related** prices is moved artificially from its fair-value level, an arbitrage is created (as you say, things can't get too far out of whack) and these funds, not being arbitrageurs (in many cases by rule), are thereby adversely affected.
There are other negative effects that can accrue, also, but I think it likely that this is the major one, in dollar terms at least.
I know that 1+1 is 2 ONLY because, gosh golly, SNOPES said it was. If only Bertrand Russell had known the Secret of Proof -- go to Snopes -- he would have never bothered with that vanity press "Principia Mathematica" of his.
"Well, gee, if Snopes or UrbanLegends says something why that just has to be true. And they have just bejimminy all sources of utterly mysterious ways of determining truth that none of us ordinary mortals have.
I know that 1+1 is 2 ONLY because, gosh golly, SNOPES said it was. If only Bertrand Russell had known the Secret of Proof -- go to Snopes -- he would have never bothered with that vanity press "Principia Mathematica" of his."
huh? Did you even read my post, or are snopes/urbanlegends hot button words for you?
Giving Snopes any credit whatsoever is indeed one of my proximity fuzes.
BTTT
bttt
Well, generally speaking, I find s- & urbanlegends handy if for no other reason that they will have something posted because someone has questions about the same thing I have questions about.
However, the google link included in that post dredges up some interesting and apparently legitimate debate about this issue.
I guess I could see how some of these back and forth effects between the real stocks and the derivatives could happen, particularly in the short term, but it seems to me that nothing that happened in the derivatives market could counter-act real price movements in the real markets-- i.e., by real movements I mean decisive movements in one direction or another based on real events, such as earnings, new products, lawsuits, etc.. that either directly affect underlying value or that are expected to affect it in the future. Would you agree?
They are as willing to deliver a lie as the truth -- just that they recoginize a lie has to be packaged in amoung an interesting stack of true stories. In my book that makes them the worst kind of liar.
The practical reason is that the ''value'' of a share of stock is, in the majority, a matter of perception. It's child's play to find a pair of highly similar companies, one of whose share price is 5, 6, even 10 times that of the other. If pushed, I'd reckon that something on the order of 70% of the typical company's share price is represented by emotion, as opposed to being a valuation of hard assets. And, as we saw very clearly from March 2000 to November 2002 or so, this figure can easily reach 100% on numerous occasions.
Historically, the derivative ''tail'' can and has wagged the stock mkt dog on numerous occasions, the most famous of which were of course Black Monday, Oct 19, 1987 and the LTCM debacle in August-September 1998. ''Counter-act''? Nosirree, Bob -- the derivatives mkt was the primary actor in these and other instances; the share prices tagged along willy-nilly. You might want to have a look at the old Rubenstein-Leland model, usually called ''portfolio insurance''. If you do, you'll likely be shocked at the naivete of the ''professionals'' who embraced this model and got chopped to bits in the mkt decline of 12-20 October, 1987.
I think your definition of "short-term" and mine are very different, as I would have defined both the '87 meltdown and the LTCM deal as short-term. As I recall, in '87 the market had recovered all of its losses by December (went looking for a chart that far back but couldn't find it, sorry). My recollection of the LTCM deal isn't as clear, but I thought its effects were washed out within a few months as well.
Attributing so much power to the futures markets would only be realistic if there weren't any cash market only investors-- in other words, if all players participated in both markets. But the truth is that there are a LOT more of us than there are folks playing with derivatives only or participating in both markets, and the cash market investors (as opposed to traders) are always watching for value, looking to pick up a deal.
As for perceptions of value-- your view became quite popular during the dot-com boom, but I would have thought that the subsequent crash would have sobered folks up a bit. Turns out, you can't just book endless losses year after year and still have a viable company or a stock that holds or increases in value. Who would have thought? ;)
There are some hidden and questionable premises in this statement you should re-examine:
1) The volume of participants in both markets is down whereas of late programmed trading accounst for over 55% of the volume. The down days are on higher volume, the up days on decreasing volume. In light volume, whatever trading occurs will move the markets further.
2) The leverage in futures markets is anywhere from 5-10 times greater than it is in cash markets.
3) One investors 'value' play is anothers unloading. Every buyer is matched with a seller. The question is did money flow out of or into the issue.
"1) The volume of participants in both markets is down whereas of late programmed trading accounst for over 55% of the volume. The down days are on higher volume, the up days on decreasing volume. In light volume, whatever trading occurs will move the markets further."
Interesting. I know I'm sitting on the sidelines now, neither buying nor selling much, as I expect that the markets could be pretty dicey in the run-up to the election, particularly if we're hit by a Madrid-style terrorist attack.
But, overall you raise an interesting question-- what are the relative sizes of the two markets-- say, S&P 500 and it's derivatives? How would we measure that? Number of participants? (I wouldn't have ANY idea how to come up with a number like that-- given that so much stock is held in mutual funds, which are themselves widely dispersed.) Total value of holdings (adjusted, as you say, by relative leverage)? Do you have a feel for the answer to this question?
==========
19871001,330.30,335.20,329.50,335.15,85128,5640
19871002,334.70,336.60,333.80,335.00,67427,6809
19871005,334.80,335.40,331.80,334.40,69085,6842
19871006,332.40,333.20,323.30,323.40,96869,6869
19871007,323.00,325.60,321.20,324.20,99673,7102
19871008,324.60,324.75,317.30,319.45,99191,7210
19871009,319.00,320.70,314.90,315.80,76186,7310
19871012,314.70,317.30,312.00,315.10,79907,7836
19871013,318.00,320.55,315.90,319.25,82040,7877
19871014,315.80,317.00,308.55,308.65,109740,7977
19871015,306.00,311.30,301.50,301.80,124810,8365
19871016,303.80,304.55,280.40,285.45,135344,9756
19871019,264.00,274.00,200.00,204.10,162022,10812
19871020,235.00,245.00,181.00,218.65,126562,11316
19871021,246.00,261.50,243.00,260.25,91802,11980
19871022,205.00,251.00,195.00,246.50,57726,11283
19871023,243.00,255.00,236.00,242.85,41945,11249
19871026,230.00,238.00,220.50,222.00,35170,11317
19871027,240.00,244.00,224.50,229.75,32241,11509
19871028,220.00,235.50,220.00,232.45,38517,12073
19871029,236.00,250.00,236.00,247.00,38670,14318
19871030,256.00,263.00,253.90,260.80,35249,14638
19871102,255.50,259.30,253.30,259.10,33551,15618
19871103,253.00,254.50,242.20,251.50,50335,15701
19871104,250.00,254.30,248.00,251.50,44268,16467
19871105,250.00,259.45,250.00,256.80,44978,16294
19871106,257.00,259.55,249.40,250.50,37989,16925
19871109,248.00,250.15,243.90,247.00,43351,17667
19871110,244.00,244.55,239.20,240.70,51590,19470
19871111,242.50,246.80,242.30,243.50,31745,19536
19871112,251.50,253.00,249.00,250.95,41769,20324
19871113,251.00,251.00,248.10,249.00,24369,20765
19871116,252.00,253.00,246.00,249.60,38727,21435
19871117,245.80,246.00,242.00,244.10,48333,23700
19871118,245.10,248.00,241.70,247.75,56262,29676
19871119,247.75,247.75,239.50,239.90,61291,33735
19871120,236.00,243.80,235.00,242.90,60725,36455
19871123,241.50,245.25,241.50,245.10,41218,37857
19871124,247.30,250.10,246.80,247.15,56396,41794
19871125,247.00,248.45,245.15,245.30,27371,43442
19871127,244.50,244.70,238.00,238.05,17804,43938
19871130,234.50,235.05,225.90,232.95,79552,49911
19871201,234.00,235.55,231.70,232.80,64037,52866
19871202,232.80,236.30,231.30,233.90,49937,55843
19871203,235.30,235.30,223.40,224.35,67752,59834
19871204,224.20,226.60,221.65,226.30,68363,64655
19871207,227.20,231.20,226.45,230.35,66887,65902
19871208,230.35,237.00,229.75,235.55,65247,70183
19871209,234.55,241.90,234.50,240.45,83668,77079
19871210,236.00,241.60,233.50,235.05,78415,88064
19871211,235.30,237.00,233.70,236.15,50015,91468
19871214,235.90,245.00,235.90,244.80,64016,95263
19871215,245.30,247.45,241.80,245.50,74899,99392
19871216,245.50,250.00,243.80,248.65,67922,104724
19871217,249.20,250.05,243.00,244.30,60696,107282
19871218,245.00,251.00,244.25,248.45,31729,108012
19871221,249.50,252.80,249.00,252.35,25760,106678
19871222,250.85,252.20,248.00,251.85,25746,107725
19871223,253.00,255.60,253.00,254.70,14464,107718
19871224,255.00,255.40,252.90,253.30,4726,108019
19871228,249.00,249.25,244.70,246.30,16933,108622
19871229,247.40,247.60,245.75,246.30,13141,108691
19871230,247.60,250.40,247.05,250.20,14948,108003
19871231,247.00,247.90,245.80,246.75,14044,106892
19880104,251.50,258.80,251.20,257.40,47624,108238
19880105,262.50,264.00,259.15,259.80,49571,109266
19880106,260.30,261.90,258.50,258.60,45817,107997
19880107,257.70,263.40,257.00,262.85,44764,108882
19880108,261.40,262.90,239.50,240.75,61477,111098
19880111,244.00,248.60,240.30,247.70,55050,114026
19880112,247.00,247.55,240.40,246.35,61974,119667
19880113,244.85,250.60,240.90,246.25,61780,114595
19880114,246.50,248.10,244.00,247.45,35435,113412
19880115,257.00,258.00,251.20,251.50,50446,113608
19880118,253.00,254.30,250.40,252.40,38329,113934
19880119,250.50,254.85,248.20,249.25,60663,115887
19880120,247.20,249.40,241.00,243.40,59984,115958
19880121,244.10,245.45,240.00,244.60,55731,133896
19880122,245.80,248.25,244.30,248.10,35336,113956
19880125,248.60,254.00,247.50,252.65,50036,113160
19880126,252.00,253.00,249.25,250.40,43575,112434
19880127,251.00,254.20,248.60,249.85,53605,113445
19880128,252.20,254.90,251.00,254.30,40565,112239
19880129,255.70,257.90,252.80,257.05,38692,115054
19880201,258.80,259.10,255.20,256.35,41179,115698
19880202,256.35,257.20,252.90,255.85,48720,115039
19880203,255.75,258.30,250.55,253.10,55596,114557
19880204,253.10,254.15,250.20,253.00,47598,113971
19880205,253.20,254.90,250.10,250.70,34394,114922
19880208,248.00,251.25,248.00,249.95,43044,114647
19880209,250.25,255.25,248.70,254.90,43421,114128
19880210,254.50,258.20,253.60,257.95,50659,110599
19880211,257.60,258.80,255.40,257.25,38391,108062
19880212,256.90,259.70,256.00,258.80,39565,109000
19880216,257.90,262.40,257.10,262.10,43365,106448
19880217,262.10,262.50,258.25,259.85,55992,104504
19880218,259.50,260.75,257.20,258.30,47704,100178
19880219,258.50,263.10,257.60,262.95,40981,97513
19880222,262.85,267.30,261.70,266.85,52717,98571
19880223,266.75,267.20,263.25,265.50,67353,94418
19880224,264.80,267.50,264.10,265.20,51259,90802
19880225,264.80,268.90,261.00,262.85,63241,88248
19880226,263.20,264.00,261.90,263.35,36834,86688
19880229,264.50,268.10,264.10,267.30,40382,87067
19880301,268.00,268.60,265.30,267.65,62303,79886
19880302,269.50,269.70,266.90,268.35,50394,76039
19880303,268.00,268.95,266.70,268.45,37654,74633
19880304,267.70,269.20,264.55,267.20,49440,71393
19880307,266.70,268.45,265.85,268.30,38861,69458
19880308,268.30,270.80,268.15,269.10,60486,65632
19880309,269.40,271.10,268.40,269.65,52343,59873
19880310,269.10,269.65,262.90,262.90,68549,49397
19880311,264.20,265.60,260.75,265.50,65749,43356
19880314,265.00,267.25,264.40,266.40,52690,39376
19880315,266.80,266.80,265.00,266.00,45000,36988
19880316,265.50,269.50,264.70,268.80,48182,35243
19880317,269.50,271.20,268.80,270.65,63045,33951
These lines are, l to r, date, open, high, low, close, volume, open interest.
The SP 500 futures never closed at 335 or higher again until the SP1989U contract did so on 14 July 1989. Not exactly short-term, eh?
Depending on which mkts you're talking about, the recovery from the LTCM meltdown also took considerably longer. Swap spreads stayed well-skewed for about a year and the currencies mkts didn't normalise until roughly mid-2000.
Well, since both the LTCM and the '87 problem were derivatives market problems, it's not surprising that the derivatives markets stayed screwed up-- I was thinking of the regular indices, although I may have had the Dow in mind rather than the S&P. I'm going to go look again for those index numbers, and if someone will give me the LTCM date I'll look for index data around that time as well. I really want to know the answer to this question, and I'm surprised that it looks like I'm mis-remembering things. ;)
It sure matters what days you pick, doesn't it? Here are some numbers I pulled out on the '87 crash:
Date S&P500 Dow
10/1 327 2639
10/16 283 2246
10/19 224 1739
12/31 247 1938
1/4 256 2040
I didn't look earlier than October, so don't know if the highs were higher, but before Black Monday the indices had lost about 13% from the 1st. On Black Monday they lost another 21-22%, with cumulative losses from the 1st being 31-34%. Early January numbers were a good bit better than late December, but it's not a flakey choice of date since those numbers were hit again or bettered several times during January '88. At any rate, by January 4th the indices were still down 22-23% from the first of Oct, but only down 9% from the pre-Black Monday close.
So, they certainly didn't recover completely, but they had made back 2/3 of the Black Monday loss by early January. However, a big chunk of the total loss came through gradual deterioration in early October, and they had only made back 1/3 of that loss.
Fair enough? ;)
George Soros?
Soros wants to crash the market. This guy with 990N tries to keep the market from crashing.
I didn't choose the date of the high for the year, nor the low; I chose merely the first date of the month in which the huge downmove occurred.
Our discussion was about S&P prices. While I chose to cite data about the futures contracts, I've no quarrel with using the ''cash'' S&P figs. No difference, really, over the longer term. To be sure, the futures will be at a discount to the ''cash'' index, or have a premium over it, from time to time.
This is true of any market you choose to name.
I would VERY much appreciate...but, I don't really give a damn...if you would refrain from accusing me of any dishonest statistical presentation. This is idiocy incarnate. I haven't any agenda at all except to be profitable in trading, and ANYONE who operates under such apparent self-delusion as you, from your comments, do, or under any other false assumptions will not be profitable.
If that very modest condition, of not operating under false assumptions, is unacceptable to you, well then (snap).
As in fingers, as in right in front of your nose.
Ave atque vale.
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