StockFetcher Forums · General Discussion · Market Makers<< >>Post Follow-up
glgene
523 posts
msg #47644
Ignore glgene
10/25/2006 3:07:15 PM

Can market makers (MMs) manipulate ETFs the same way they can do with a single stock?


nikoschopen
2,824 posts
msg #47646
Ignore nikoschopen
10/25/2006 4:13:56 PM

Anything that can be bought and sold can and will in theory be manipulated, at least in the short run. Just like the futures, however, keep in mind that when the tail starts to wag the dog (that is, when either the futures or the ETF starts to act like a basketcase with complete disregard to the underlying index) you will often see a score of arbs rear their ugly heads to capture the spread between the two. This in turn will bring the ETFs and the futures back in synch with the index.


glgene
523 posts
msg #47647
Ignore glgene
10/25/2006 4:20:20 PM

If SPY, QQQQ, etc. are an ETF for an index, how can there be a spread?


nikoschopen
2,824 posts
msg #47651
Ignore nikoschopen
10/25/2006 4:58:17 PM

In a near perfect world, when the S&P 500 is trading at 1,000 the SPY should come to rest at 100 (1/10 of the index, if I'm not mistaken). At any rate, let's say that the index is at 1,100 but the SPY, for some reason or another, is at 105. In this case, the two are clearly out of balance. What will then ultimately happen is that bunch of program trades will kick in to capture the difference (read, arbitrage) between the two by shorting the index (all 500 companies that make up the S&P 500) and buying the futures or the ETF until the two come into equilibrium once again.


glgene
523 posts
msg #47667
Ignore glgene
10/26/2006 8:30:01 AM

Thanks, Niko, for your explanation. Good stuff, here.


maxxam80
108 posts
msg #47675
Ignore maxxam80
10/26/2006 12:49:17 PM

realistically can we profit from this arb?


nikoschopen
2,824 posts
msg #47676
Ignore nikoschopen
10/26/2006 2:52:50 PM

Program trades are largely calculated based on "fair value". Unfortunately, nobody knows for certain what the fair value is on which these programs are calibrated. But once they kick into gear, you'll definitely feel the ground shaking around you because that's when the indices either begin to soar or plummet furiously in very short duration. While it's possible to profit during these violent moves, it's far wiser to stay clear until the dust settles.


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