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In-Reply-To: <200204241826.g3OIQD8A019508@xxxxxxxxxxxxxxx>
Ah... I had wondered about that but the prices move so quickly -
especially the emini - that I wondered how it could be possible.
So do the arbitragers wait for a certain spread - say half a point (I
rarely see spreads this size for long) and then jump in? I've plotted
the two the charts on top of each other and they are so close they could
be twins! How do they guarantee getting a good fill on the emini?
Is this just a game for the big boys?
Cheers,
Ian
> > 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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