Where an index price actually comes from

The number has a supply chain, and knowing its links explains most of the odd behaviour you will see later.

Three links

• The constituent shares trade on their exchange, each with its own bid and ask.
• An index provider - FTSE Russell, S&P Dow Jones Indices, Deutsche Boerse and others - applies the published rule to those prices and calculates a level, typically every few seconds.
• Data vendors carry that level onward to terminals, news sites and brokers.

The provider is a business selling a calculation and licensing its name. That is why index names are trademarks, and why a broker offering an index product either licenses the name or gives its product a different one.

The cash index stops when the shares stop

The level is computed from share prices. When the underlying exchange closes there are no new share prices, so there is no new index level. The cash index does not drift overnight; it stops.

This is the single most important consequence in the module. Whatever is happening in the world between the close and the next open, the cash index is a frozen number until its constituents trade again.

But the derivative venue does not stop

Futures on major indices trade far longer than the underlying cash market - close to around the clock on the big contracts. Those are traded prices, made by participants willing to deal now, and they carry on reflecting news all night.

So at three in the morning there are two very different objects with the same name: a frozen cash calculation, and a live futures price that has moved. They are not the same thing, they are not supposed to be, and the gap between them at the next open is lesson 9.

Why the number is a little stale even in the session

An index level is computed from the last traded price of each constituent. A quiet constituent that has not traded for several minutes contributes a price from several minutes ago.

So the level is a mosaic of prices from slightly different moments, not a photograph of one instant. In a fast move this matters, because the index lags the market it is measuring by however long its sleepiest constituents take to print.