How do Dow and S&P 500 just change over night or with negative news? Who manipulates the prices?
In: Economics
Index futures are a way to bet on the future of the whole market without having to hold the whole market. You can bet on the outcome at a 250:1 leverage ratio with a standard S&P contract.
Aside from highly geared standalone bets, people also use them to hedge other risks- one strategy might short a foreign index to hedge against region-specific market risks to a globally diversified portfolio.
The future itself is based on a contract on delivery of financial assets at a specified date— just like it was for sugar or crude oil — but isn’t necessarily a representation of the daily or future price of those assets. The price of the derivative is just a reflection of the current market for that derivative. Which is a roundabout way of saying, very generally: if more people want to buy than want to sell, the price of the index future will go up.
Add in the fact that most trading volume is done by machine, and we can infer that the price of index futures will move around overnight based on anything either human traders *or* algorithmic traders decide will impact the market outlook for the following day. It’s mostly noise, just like any other daily asset price motion.
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