Because trading at the London Metal Exchange (LME) ends each day at about the time trading begins in New York by Chicago Mercantile Exchange (CME) Group, it is possible for pricing at the earlier exchange to have some influence at the later one. The connection is shown on “Cumulative percentage price change” (below), which includes spot prices for copper (COMEX:HGM14) at CME and LME as well as the copper exchange traded note (ETN) DJ-USB.
The chart indicates that the three prices stayed tightly grouped from September through November 2013. At the beginning of December, the group broke apart, with CME copper escalating more quickly than the others as they peaked in December 2013. Price volatility is larger at CME and LME than for the ETN, although the differences are not present to a large extent until December 2013 through February 2014.
Cumulative percentage price changes for the May 2014 copper futures contract are virtually the same as the changes each day for the cash price. The similarity is shown in “Spotting copper price diversions” (below). These parallel price changes make it possible to compare the relationships among the closing LME copper price, the opening futures price and the change in the futures price (and by extension the spot price of copper) at the close of the day.
The possibility of using the daily beginning difference between CME copper futures and the associated ETN in a trade completed within one day was the subject of “Leveraging futures vs. ETN differentials” (September 2013). Overall results on the example trades shown were profitable, although a precaution was included that end-of-day prices might not reflect actual gains and losses in real trading situations. Before describing a new study that uses May 2014 futures and copper ETNs, we will list some of the caveats suggested by a reader who was asked to critique the September 2013 trade based on:
- Availability of margin for futures and ETNs.
- Real-time monitoring of the bid-ask spreads.
- Transaction costs.
The concept behind the one-day trade is that frequently a relatively large positive difference between the futures price and ETN at the open is associated with a negative price change for futures later in the day. The reverse is often the case for a beginning negative difference.