# Interaction of SPY etf with futures?

In the discussion to this question JoshK mentioned that the SPY etf has special interactions with futures contracts. I am curious what this interaction might be in particular?

in a previous question you were looking at using the VWAP price of SPY as a possible technical indicator or input variable in your investment decision process.

The difficulty that you are going to encounter is that SPY and the S&P 500 future (right now ESU9) are interchangeable. Here is a chart from Bloomberg showing SPY vs ESU9 from Bloomberg.

Now you can see that they trade in lock-step. There is a constant difference between the two of them - that's called the basis. The basis exists because of some technical factors that you can read about in a thousand other places.

Now there is a little friction when exchanging between futures and SPY's, but it's pretty simple overall.

This past Friday, for example, \$233b worth of ESU9 futures traded. Only \$18b of SPY traded in the same period. To make it even a little more complicated, SPY ETFs will trade some volume in the auction. Often the auction is just a few equity financing people exchanging shares with each-other. That really means little to anyone.

So I guess the point that futures dwarf SPY moves from a volume perspective.

You can have a whole other discussion about the importance of the underlying stocks, but that's for another time.

• I see, so in principle the intraday VWAP of ESU9 should have more relevance due to the increased volume? When you say right now ESU9, do you mean that the next month expire future contract usually has most volume and is therefore most relevant? Sep 1 '19 at 2:23
• I'm not sure which has more relevance necessarily. In your research / analysis / data mining / etc you can look at many different input values. My point is just that VWAP is the volume weighted average price. The VWAP of SPY is just massively dominated by the futures VWAP because of it's size. They probably are linked to each-other in many ways - but you should be aware of how the two of them go together. Does that make sense? Sep 1 '19 at 2:31
• Yes, thank you for the information! I suspect that neither the SPY nor the futures VWAP is actually really relevant, since the index is set up to try to mimic the collective behavior of a basket of stocks and not deviate much from the aggregate price at any time. Which means, one should actually look at the VWAP of each SPY constituent and take a weighted average to have a hope of arriving at something actually dynamically meaningful. Sep 1 '19 at 11:19
• Ya, agreed. And there are some other issues as well. SPY holds part of it's assets in cash, so you need to be aware of that effect as well. The main thing is just to be aware of these nuances.... Sep 1 '19 at 14:32

# Special Relationship and the added dimension to VWAP.

As we know the expiry’s final settlement price is the last 30 minutes-weighted average price of the spot market. Due to this, many investors/traders get confused with the prices and some option prices may look like an arbitrage or free money (options quoting below intrinsic value).

This may not be correct as the spot prices are moving independent and not according to the VWAP whereas using futures prices are quoting at the calculated VWAP and it’s taken care by the arbitragers if any deviation occurs market arbitragers would jump in and be sure they will jump in before you could do. So, if futures are referenced in the last 30 minutes of expiry, these circumstances and confusions can be avoided. Hope this helps.