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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (39273)	12/13/1998 8:36:00 PM
From: accountclosed	Read Replies (1) \| Respond to of 132070

you might want to reread the message as i edited it and gave a second url which also has commodities. it isn't that complex. taking the globex, i have the s&p down 6.40 and the nasdaq down 13.00. Note that these are futures contracts. So the s&p contract is down over 1/2% and the nasdaq contract is down almost 1%. People that are really tuned into this stuff would know how much away from fair value a contract is. I, somewhat inaccurately, ignore that issue. If that is confusing, I will attempt a little explanation. The cash index and the futures index are tightly tied to each other. The futures index is settled in cash, in this case in mid-March. Traders are constantly monitoring the spread between the cash index and the futures (although of course, cash index is not trading except during market hours). Envision a situation where they get out of whack. As an exaggeration to make a point, let's say the cash index is 1000 and the march futures are 1100. A trader could buy the cash and sell the futures contract. Thus the trader has bought for 1000 and simultaneously contracted to sell for 1100 in just a few months. Anyway, there is a calculation that accounts for margin requirements and the period of time times the interest rate that calculates what "fair value" of the contract is. If it gets outside of a small distance one way or another from "fair value", buy or sell "programs" hit the market, which exploit this situation. People think that "programs" mean computer programs but in fact the term originates from the fact that a large number of stocks are being traded. A program might not actually buy/sell all 500 stocks in the s&p 500 index. They may have a lesser sample of stocks that model the movement of the index close enough for their purposes. The more stocks that have to be traded, the higher the transaction costs that have to be plugged back into the equation which decides if this is economically feasible. ==== If a true program trader/futures trader were reading this, I could probably be corrected on many points. But back to my original idea...I just look at the magnitude of the change in the futures price and ignore the fact that it might have started a buck or two off from fair value to start the session.