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This question is an exact duplicate of:

What is the relationship between E-mini SPX futures and the SPX index. Besides the obvious, one is cash the other is a futures product. How does buying/selling in one product influence the other. If someone sells 1000 contracts of E-mini futures how does that affect the S&P500 Index?? The trade he made should only affect the futures market. The seller isn’t technically selling shares in each individual stock within the SP500, so how does the cash market adjust to the sell order within the futures market??

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marked as duplicate by chrisaycock Oct 31 '13 at 21:59

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

PLEASE, can you mark more of the answers given to your questions as complete or comment on why the answer(s) is/are not sufficient? I know I repeat myself but you keep on asking questions but hardly provide any feedback or mark answers as being sufficient. I find it disrespectful to keep on asking heaps of new questions without commenting a thing on the help others provided. – Matt Wolf Nov 1 '13 at 1:06
Sorry Matt. Went back to the question and checked them off. I appreciate your help. – jessica Nov 1 '13 at 2:01
Regarding your question, try to look at the big picture. In financial trading it all comes down to the transfer of risk. If new risk is initiated then that "trickles down the system". Someone going long large amounts of S&P futures may transfer risk but the counter parties in the market, such as market makers or sell-side firms may hedge such risk in the index or futures which counters the long initiation. Look at large option trades and google "pin risk" and you see that prices are more often than not trading around large strikes especially in large fx options close to expiry. – Matt Wolf Nov 1 '13 at 2:52
Thank you for the help Matt. The pin risk you mentioned is really cool. I can see some traders using the OI on the strikes of options to place directional trades. I would imagine if there is a lot of OI on calls on the spy at around 1790, if price were to edge over it slightly, and it becomes slightly within the money near expiration, nonetheless with a high delta of expiring in the ITM, you might see some buying of the underlying. In this scenario options, albeit a derivative will influence the underlying. I wonder however, if the same logic extends to futures where everything is cash settled – jessica Nov 15 '13 at 10:51
I mean if instead of the SPY, we replaced with the /ES contract does the same logic hold? Your not really deliviering anything, so their is no reason for anything in the options world to spill over into the underlying's world. (By the way, I know SPY isn't 1790, I am just giving a number example for where the index is) – jessica Nov 15 '13 at 10:53
up vote 1 down vote accepted

In general futures are contract which are marked to market everyday and are settled against the cash/underlying price at a future delivery date.

For the SPX, I think there are only deliveries in Mar, Jun, Sep and Dec. In theory, one can calculate the implied future price using the short rates and the spot price. One thing to note is that there is a convexity between forwards and futures as the future margin calls are done on a daily basis, while the forward does not exchange cash until delivery.

So basically, even though one does mot know what will be the price at delivery date, you can imply a non arbitrage price from the spot and short rates. This is what forces the spot and future to move somewhat in the same direction. Like with any product which can be replicated, if the price deviates by more than the bid-ask + slippage from the theoretical price, one will try to arbitrage the difference.

I bumped into this interesting link which mentions the dividends adjustment.

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"..convexity between forwards and futures" -- What do you mean by convexity between the two? What my question is driving at is why do the two markets move in lock step? – jessica Nov 1 '13 at 2:00
What my question is driving at is if I place a larger on the SPX futures, there has to be an equivalent large order on the SPX spot for them to move in lock step. What if there isn't that equivalent large order? the two prices will diverge and if then, at the point, the spread is large enough arbs. will step in and narrow the spread. – jessica Nov 1 '13 at 2:05
@jessica: I think the explanation is that you can make a forward by buying the spot and borrowing the money necessary to buy it until future delivery. Therefore if it deviates from this implied price, people will just try to take advantage of this relationship and this is what keeps the price in line. – BlueTrin Nov 1 '13 at 9:44

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