Currency Futures vs. Spot FX?

[fromJDtoFX]

Hey all, new to this website. Just wondering if anyone here trades currency futures (minis or otherwise). Any thoughts on intraday trading the futures vs. the spot market? Preferences? The reason I ask is that the more I read about the various practices of the fx spot market makers, and the generally small size of any idividual ECN or market maker (rather than the global interbank spot market that no retail trader can trade on), it seems like we should all be trading the futures market instead of spot fx (unless trading during CME hours isn’t possible, i.e you live in the U.S. and have a day job).

[rhodytrader]

For a small trader especially, spot forex is a better route because it’s so much more flexible in terms of position sizing. In futures the smallest contract sizes are about the size of a mini contract in spot. As for volume, it’s not even worth thinking about. Unless you’re trading positions that have six or more zeros in them or aren’t sticking to the majors and major crosses then there will be more than enough liquidity for you in spot.

By the way, there are market makers in futures too.

[fromJDtoFX]

True, but futures mm are much more heavily regulated by cftc,nfa, and the exchange. Re: liquidity, obviously my single regular lot positions won’t move either market. However, my spread is lower in futures precisely because there is more liquidity (and to some extent because there is a (relatively small) commission). As far as position size flexibility, that is true. Other than that, I can’t see any other reason to trade spot (again, save for market hours, or wanting to trade an esoteric cross). It has lower trans costs. More regulated. Money is safer. More volume. And, you actually get volume data, which is invaluable to technical analysis. Maybe the charts/platform isn’t as good w futures brokers - though you can pay for better charting.

[rhodytrader]

True, but futures mm are much more heavily regulated by cftc,nfa, and the exchange. Re: liquidity, obviously my single regular lot positions won’t move either market. However, my spread is lower in futures precisely because there is more liquidity (and to some extent because there is a (relatively small) commission). As far as position size flexibility, that is true. Other than that, I can’t see any other reason to trade spot (again, save for market hours, or wanting to trade an esoteric cross). It has lower trans costs. More regulated. Money is safer. More volume. And, you actually get volume data, which is invaluable to technical analysis. Maybe the charts/platform isn’t as good w futures brokers - though you can pay for better charting.

Obviously, the volume thing is a running issue, but I’d make two points. First, you can use the futures volume in application to spot trading. Second, futures volume represents only a fraction of the total. That means there [I]could[/I] be distortions at times.

On the transaction costs, you better make sure of your figures. You can easily get sub-1 pip spreads on the most popular pairs in the spot market, and even negative spreads sometimes if you’re trading through an ECN. And of course if you’re with a market making broker there’s no commission.

As for regulation, the bulk of US brokers are members of the NFA and regulated by the CFTC just as the futures brokers are. They just don’t have the added layer of exchange regulation.

And on the “money is safter” front, given that several of the big forex brokers are also in the futures game I’m not buying it. The NFA has specific capital requirements for the forex brokers specifically to protect customer capital.

[fromJDtoFX]

Agreed, we could go back and forth on volume all day long. I do think that with respect to currency futures, the volume you are getting from the CME is the bulk of the trading volume in futures (in other words, there is not a lot of volume on Globex outside of the CME pit hours - those are the hours (7-2) where the volume is “true”; OTOH, though I suspect the european futures exchnages handle much less volume than Globex/CME, I don’t really have the facts here. Assuming they are lighter volume relatively speaking, then the data you are getting from CME/Globex really is THE volume data for currency futures). I would be interested to hear thoughts though, since some of this is just conjecture on my part.

OTOH, maybe you mean that futures volume is a fraction of spot volume? Yes, definitely. And as you mentioned, to some extent, you can use futures volume data in the spot market. Though, on an intraday basis, for instance, it is not all that helpful. Whereas with futures, for ex, you can see on a 15 minute chart whether there was conviction (volume) behind the last [long green cadlestick], etc. In addition to open interest, COT, etc.

Thinking about futures vs spot, and volume, etc. I have a thought. As you probably know, futures prices are derived mostly from spot prices, with a time/interest rate component baked into the price (as the future approach delivery date, the prices converge). There is no opportunity to arbitrage the future and the spot because of this fact. Interesting issue is whether it’s a tail wagging the dog situation (futures price derived from spot price, but the actual price discovery is really being done on the futures exchange - the FED came out with a paper fairly recently analyzing this issue. I haven’t yet taken a look, but apparently they came up with some interesting conclusions. I can post it if anyone is interested).

Re; Transaction costs. You can find (at some times on a limited number of brokers) 1 pip spreads on majors. But that is the exception, not the rule. W/ futures, 1 pip is the rule. Typically, the lower spreads are on ECNs. But there aren’t that many. MBT, Dukascopy. Who else? And on MBT, the commissions are several times bigger than w a futures roundtrip trade (so futures are still more cost effective). Dukascopy is a good broker w good prices (low spread, lowish commission), but it is out of reach for most. And, frankly, until it is a bank, I wouldn’t send my money there. Switzerland is quite lax w/ forex spot broker regulation. Though that is changing.

I would love to hear about other ecn/brokers that offer low (1pip) spreads. I’m just not familiar with any besides the two ECNs I mentioned and the big guys in the industry (FXSolutions, GFT, etc.) that have relatively wide spreads.

Re; safety/regulation of spot v futures. The key point is that futures brokers must segregate customer accounts. This is a legal term tied to bankruptcy law. “Segregated Accounts” get first priority, ahead of creditors, in bankruptcy. This is not the case with spot forex brokers (even if they are also futures brokers). There is nothing in the Bankruptcy code that protects segregated accounts wrt spot forex (though some argue the code is vague). Therefore, even if a spot broker “segregated” customer accounts, there would likely be no protection in bankruptcy. Congress would have to amend the bankruptcy code. I would stress that no futures broker customer with a futures account has EVER lost money in a bankruptcy. That is not tru with spot forex brokers. Customers lose money (REFCO and others). While spot forex brokers have capital requirements (I think it is 20MM), in a bankruptcy, clients could still lose money (and do). I can’t remember how often capital must be reported, but even if it is monthly, that leaves plenty of time for a forex broker to get into trouble. It’s not like they mark their capital to market every day. There is therefore intra-month capital risk. And if they only report quarterly, well…you get the point. That is a huge, material risk. There really is no comparison on the safety issue. And while these risks may seem remote to some, as a lawyer who used to work in the derivatives industry, I can tell you these insolvencies happen all the time in both the securities and futures industry (and the customers are always safe). Bears clients? Lehmans clients? SAFE! Though I never worked in the spot forex industry, those dealers can go insolvent just like a futures or securities broker. And they do. The difference being that you are generally safe with a f/s broker. But not with a spot fx broker.

Sorry if this is a bit repetitive, but I just want to make sure folks understand the risk factor with forex v futures. Be aware! That is my biggest issue with spot FX. I love the flexibility; I like the fact that you can demo away to your hearts content (with live data); I like the free charting - generally of good quality. But the regulatory landscape scares me. Some of the other factors above are arguable either way (volume; cost, etc.); the regulatory issue is not.

[wongpasar]

@fromJDtoFX

Agreed, we could go back and forth on volume all day long. I do think that with respect to currency futures, the volume you are getting from the CME is the bulk of the trading volume in futures (in other words, there is not a lot of volume on Globex outside of the CME pit hours - those are the hours (7-2) where the volume is “true”; OTOH, though I suspect the european futures exchnages handle much less volume than Globex/CME, I don’t really have the facts here. Assuming they are lighter volume relatively speaking, then the data you are getting from CME/Globex really is THE volume data for currency futures). I would be interested to hear thoughts though, since some of this is just conjecture on my part.

OTOH, maybe you mean that futures volume is a fraction of spot volume? Yes, definitely. And as you mentioned, to some extent, you can use futures volume data in the spot market. Though, on an intraday basis, for instance, it is not all that helpful. Whereas with futures, for ex, you can see on a 15 minute chart whether there was conviction (volume) behind the last [long green cadlestick], etc. In addition to open interest, COT, etc.

Thinking about futures vs spot, and volume, etc. I have a thought. As you probably know, futures prices are derived mostly from spot prices, with a time/interest rate component baked into the price (as the future approach delivery date, the prices converge). There is no opportunity to arbitrage the future and the spot because of this fact. Interesting issue is whether it’s a tail wagging the dog situation (futures price derived from spot price, but the actual price discovery is really being done on the futures exchange - the FED came out with a paper fairly recently analyzing this issue. I haven’t yet taken a look, but apparently they came up with some interesting conclusions. I can post it if anyone is interested).

Re; Transaction costs. You can find (at some times on a limited number of brokers) 1 pip spreads on majors. But that is the exception, not the rule. W/ futures, 1 pip is the rule. Typically, the lower spreads are on ECNs. But there aren’t that many. MBT, Dukascopy. Who else? And on MBT, the commissions are several times bigger than w a futures roundtrip trade (so futures are still more cost effective). Dukascopy is a good broker w good prices (low spread, lowish commission), but it is out of reach for most. And, frankly, until it is a bank, I wouldn’t send my money there. Switzerland is quite lax w/ forex spot broker regulation. Though that is changing.

I would love to hear about other ecn/brokers that offer low (1pip) spreads. I’m just not familiar with any besides the two ECNs I mentioned and the big guys in the industry (FXSolutions, GFT, etc.) that have relatively wide spreads.

Re; safety/regulation of spot v futures. The key point is that futures brokers must segregate customer accounts. This is a legal term tied to bankruptcy law. “Segregated Accounts” get first priority, ahead of creditors, in bankruptcy. This is not the case with spot forex brokers (even if they are also futures brokers). There is nothing in the Bankruptcy code that protects segregated accounts wrt spot forex (though some argue the code is vague). Therefore, even if a spot broker “segregated” customer accounts, there would likely be no protection in bankruptcy. Congress would have to amend the bankruptcy code. I would stress that no futures broker customer with a futures account has EVER lost money in a bankruptcy. That is not tru with spot forex brokers. Customers lose money (REFCO and others). While spot forex brokers have capital requirements (I think it is 20MM), in a bankruptcy, clients could still lose money (and do). I can’t remember how often capital must be reported, but even if it is monthly, that leaves plenty of time for a forex broker to get into trouble. It’s not like they mark their capital to market every day. There is therefore intra-month capital risk. And if they only report quarterly, well…you get the point. That is a huge, material risk. There really is no comparison on the safety issue. And while these risks may seem remote to some, as a lawyer who used to work in the derivatives industry, I can tell you these insolvencies happen all the time in both the securities and futures industry (and the customers are always safe). Bears clients? Lehmans clients? SAFE! Though I never worked in the spot forex industry, those dealers can go insolvent just like a futures or securities broker. And they do. The difference being that you are generally safe with a f/s broker. But not with a spot fx broker.

Sorry if this is a bit repetitive, but I just want to make sure folks understand the risk factor with forex v futures. Be aware! That is my biggest issue with spot FX. I love the flexibility; I like the fact that you can demo away to your hearts content (with live data); I like the free charting - generally of good quality. But the regulatory landscape scares me. Some of the other factors above are arguable either way (volume; cost, etc.); the regulatory issue is not.

hi! anyone can help me to understand more about volume in futures??
what broker that connected their futures with CME? and what trading platform…?
more importantly is that broker (chart) will show real volume not tick volume like in MT4 forex chart… -_-’

chart like this one… it showed Open interest too… if that is possible to do it, it will be better

would like really appreciate to anyone that would help

best regards,

wong