Forex vs. Futures
The global foreign exchange market is the largest, most
active market in the world. Trading in the forex markets
takes place nearly round the clock with over $1 trillion
changing hands every day. It is the main event.
The benefits of forex over currency futures trading are
considerable. The dissimilarities between the two instruments
range from philosophical realities such as the history
of each, their target audience, and their relevance in
the modern forex markets, to more tangible issues such
as transactions fees, margin requirements, access to liquidity,
ease of use and the technical and educational support
offered by providers of each service. These differences
are outlined below:
• More Volume = Better Liquidity. Daily currency
futures volume on the CME is just 1% of the volume seen
every day in the forex markets. Incomparable liquidity
is one of many advantages that forex markets hold over
currency futures. Truth be told, this is old news. Any
currency professional can tell you that cash has been
king since the dawn of the modern currency markets in
the early 1970's. The real news is that individual traders
from every risk profile now have full access to the opportunities
available in the forex markets.
• Forex markets offer tighter bid to offer spreads
than currency futures markets. By inverting the futures
price to compare it to cash, you can readily see that
in the USD/CHF example above, inverting the futures dealing
price of .5894 - .5897 results in a cash price of 1.6958
- 1.6966, 8 pips vs. the 5-pip spread available in the
cash markets.
• Forex markets offer higher leverage and lower
margin rates than those found in currency futures trading.
When trading currency futures, traders have one margin
rate for "day" trades and another for "overnight"
positions. These margin rates can vary depending on transaction
size. InterBank Group currency trading gives the customer
one rate all the time, day and night.
• Forex markets utilize easily understood and universally
used terms and price quotes. Currency futures quotes are
inversions of the cash price. For example, if the cash
price for USD/CHF is 1.7100/1.7105, the futures equivalent
is .5894/ .5897; a methodology followed only in the confines
of futures trading.
Currency futures prices have the added complication
of including a forward forex component that takes into
account a time factor, interest rates and the interest
differentials between various currencies. The forex
markets require no such adjustments, mathematical manipulation
or consideration for the interest rate component of
futures contracts.
• Forex trades executed through InterBank Group
are commission free. Currency futures have the added
baggage of trading commissions, exchange fees and clearing
fees. These fees can add up quickly and seriously eat
into a trader's profits.
In contrast, currency futures are a small part of a
much larger market; one that has undergone historical
changes over the last decade.
• Currency futures contracts (called IMM contracts
or international monetary market futures) were created
at the Chicago Mercantile Exchange in 1972.
• These contracts were created for the market
professionals, who at that time, accounted for 99% of
the volume generated in the currency markets.
• While some intrepid individuals did speculate
in currency futures, highly trained specialists dominated
the pits.
• Rather than becoming a hub for global currency
transactions, currency futures became more of a sideshow
(relative to the cash markets) for hedgers and arbitragers
on the prowl for small, momentary anomalies between
cash and futures currency prices.
• In what appears to be a permanent rather than
cyclical change, fewer and fewer of these arbitrage
windows are opening these days. And, when they do, they
are immediately slammed shut by a swarm of professional
dealers.
These changes have significantly reduced the number
of currency futures professionals, closed the window
further on forex vs. futures arbitrage opportunities
and so far, have paved the way to more orderly markets.
And while a more level playing field is poison to the
P&L of a currency futures trader, it's been the
pathway out of the maze for individuals trading in the
forex markets.
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