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Technology Stocks : Stock Swap

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To: V. who wrote (10869)	1/24/1998 10:20:00 AM
From: Patrick Slevin	Read Replies (2) of 17305

Do The S&P Futures really lead Cash? Okay. You want serious stuff? You got it. I will now bore the tears out of you with market stuff. Here's info from a CBOE MM from my e-mail stack. ~~~~~~~~~~ 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. (Boldface is mine--PJS) 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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