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> The S&P is open outcry and the S&P emini is electronically traded
> yet they usually manage to move together and stay within 0.25
> point of each other, even in fairly fast-moving markets. How come?
Arbitrage. You can effectively exchange 5 ES's for 1 SP. So suppose
the SP is currently at 1234.00 and the ES is at 1234.50. You could
buy X SP's, sell 5*X ES's, and have a risk-free profit (after costs,
which are very low for the people/institutions doing this). You
could hold the long SP / short ES position until the spread moves the
other direction, at which time you exit both positions for another
risk-free profit. Even if you don't, I believe you can cancel out
the positions because they're basically the same thing, but I'm less
sure about that.
Risk-free profit draws large money. Large money thrown at
aberrations like that tends to make the aberrations go away. Why?
Buying pressure on the SP makes it go up, selling pressure on the ES
makes it go down, and *poof* -- the spread between them vanishes.
Gary
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