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The Chairman
Victor Niederhoffer

06/08/2004
Academic Arbitrageurs

The article by Kurov and Lasser, "Price Dynamics in the Regular and E-mini Futures Markets," Journal of Financial and Quantitative Analysis, June 2004, purporting to show that there are arbitrage opportunities between E--minis and the pit market, has to be a parody that only a Cervantes could have invented.

There is never a single price for a market, but a bid and asked, and these hypothetical bids and askeds change if one wants to act upon them with the electronic trades moving at the speed of light, and the trades placed on the boards from the open outcry moving at the speed of sounds and reflexes as people note a sound, record it on a machine, and doubtless other delays and it is transferred.

As they say, we need the WASPs in New York to pay full price, and we need the academics in the markets to make people think there is opportunity when there isn't and to provide a facade of arbitrage.

Synopsis of article (provided by Alex Castaldo, Ph.D.): This article purports to show that price changes in the E-minis lead price changes in the S&P and NAZ big contracts, and that trading by locals who can observe both markets is partially responsible for this. They examine events surrounding large (more than 11 contracts) trades in the bigs market.

A chart shows that "The E-mini price starts moving on the direction of the large trade [in bigs] about 15 to 20 seconds before the time stamp of the trade." Another chart shows that about 10 to 15 seconds before the bigs trade locals are making E-mini trades in the same direction as the bigs trade, while off-exchange customers are making trades in the opposite direction.

"CME locals trade very actively in Globex [i.e. E-minis."

"The E-mini terminals on the CME floor are located in an area adjacent to the trading pits. Floor traders can also use headsets to relay trades to Globex while stationed in the pits."

Conclusion: "The proximity of the locals trading E-minis to the trading pits coupled with the fast execution of Globex [...] ensures that the prices of E-minis reflect the open-outcry order flow information before it is fully incorporated into the prices of the floor traded contracts". If these results are correct (and not due to errors in time stamps or other problems) then it would be an argument for trading E-minis rather than Bigs.