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For years the assumption(and fact)was that the S & P futures provided
price discovery for almost the entire big cap equity market. In fact in
the OEX pit we actually price the options off an implied forward
quote..in essence a futures quote.
A lot of folks asume that any market that has a good cash and carry
arb(where you can cheaply buy the cash and sell the future or sell the
cash buy the future)will always draw price discovery from the futures
market and that tends to continue to be the case. An exception has
arisen in the last couple of years with the S & P future. It is viewed
by many users as being somewhat less effective for price discovery than
in the past because of wided markets than in the past and larger market
impact than in the past(market impact is the effect of moving the price
thru a buy/sell of the product). So what in fact has happened is the
cash market has become more important. The cash will in fact often lead
the future, but there is an important distinction to make when
discussing the cash. The actual buyable cash is not the cash
quote...which is merely a calculation of the components. The cash is an
actual cash market made by the basket traders who continuously offer a
bid/offer on the S & P basket. A micro view of this would be the market
for size in the spyder where Speer Leeds makes a spyder market and they
are also the largest stock specialist and basket trading firm. The
basket market makers "appear" to provide price discovery when the
markets are active and when the future starts to exhibit poor market
quality...usually at or near circuit breakers or merely on big move
days.
A big question is where do the basket traders draw data for their
market? IMHO I believe that in quiet times they look to the established
futures/options market. In active times I think they create discovery
and lean on the futures market lack of quality for a "trading out".
My concern is that people assume that cash is the quote...WHICH IS NOT A
TRADEABLE INSTRUMENT......if you look at the SPYDER you will see it
trades most actively when breakers or collars are on. You also note at
that time it diverges from the cash and isn't exactly the futures
either.
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