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How SPY and S&P 500 Futures Relate Through Basis and Trading Activity

Article Quant Q&A · Author: Kagaratsch
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Summary

The discussion describes the close relationship between SPY and S&P 500 futures. Their prices tend to move together, while the difference between them—the basis—reflects technical factors. The answer says the instruments are broadly interchangeable, though exchanging between them involves some friction. It also argues that futures trading volume can substantially exceed SPY volume, so SPY volume alone may give an incomplete picture of activity in the linked market.

A second answer focuses on expiry settlement and VWAP. It says the final settlement price is based on a weighted average of spot-market prices during the last part of the session, and suggests that futures prices may be more useful than spot prices for interpreting this settlement and apparent option mispricing near expiry. These are brief discussion points rather than a detailed analysis: the cited volume figures describe a specific example, and the settlement and arbitrage claims are not independently demonstrated or generalized across contracts.

Key ideas

  • SPY and S&P 500 futures generally move closely together, with a basis between their prices.
  • Trading volume in futures may exceed SPY volume, affecting how market activity is interpreted.
  • The discussion notes friction when exchanging between the ETF and futures.
  • It recommends considering futures prices near expiry when reasoning about settlement-linked VWAP and apparent option mispricing.

Tags

EquitiesFuturesOptionsMarket microstructure
Full text
# Interaction of SPY etf with futures?


# Interaction of SPY etf with futures?












In the discussion to this question JoshK mentioned that the SPY etf has special interactions with futures contracts. I am curious what this interaction might be in particular?

## Answer by JoshK (score 2, accepted)

https://quant.stackexchange.com/a/47435

in a previous question you were looking at using the VWAP price of SPY as a possible technical indicator or input variable in your investment decision process.

The difficulty that you are going to encounter is that SPY and the S&P 500 future (right now ESU9) are interchangeable. Here is a chart from Bloomberg showing SPY vs ESU9 from Bloomberg.

Now you can see that they trade in lock-step. There is a constant difference between the two of them - that's called the basis. The basis exists because of some technical factors that you can read about in a thousand other places.

Now there is a little friction when exchanging between futures and SPY's, but it's pretty simple overall.

This past Friday, for example, \$233b worth of ESU9 futures traded. Only \$18b of SPY traded in the same period. To make it even a little more complicated, SPY ETFs will trade some volume in the auction. Often the auction is just a few equity financing people exchanging shares with each-other. That really means little to anyone.

So I guess the point that futures dwarf SPY moves from a volume perspective.

You can have a whole other discussion about the importance of the underlying stocks, but that's for another time.

## Answer by Atul Agarawal (score 1)

https://quant.stackexchange.com/a/47425

## Special Relationship and the added dimension to VWAP.

As we know the expiry’s final settlement price is the last 30 minutes-weighted average price of the spot market. Due to this, many investors/traders get confused with the prices and some option prices may look like an arbitrage or free money (options quoting below intrinsic value).

This may not be correct as the spot prices are moving independent and not according to the VWAP whereas using futures prices are quoting at the calculated VWAP and it’s taken care by the arbitragers if any deviation occurs market arbitragers would jump in and be sure they will jump in before you could do. So, if futures are referenced in the last 30 minutes of expiry, these circumstances and confusions can be avoided. Hope this helps.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.