If you are an FX trader let me ask:
- Have you ever been re-quoted?
- Have you ever experienced significant market slippage?
- Have you ever wondered if there was a better spread elsewhere?
- Have you thought that you should have been filled but were not and had little recourse?
As someone who has traded Forex extensively, I certainly have had to ask these questions to myself. However, as someone who also trades futures the thing that bothers me most is lack of anything centralized. I have put together some initial FAQ’s for traders looking to diversify into Currency or FX based Futures and Options trading.
Standardized Market for all Futures and Options
Variable vs. Centralized – When you are trading spot FX your pricing and execution varies from broker to broker even trading on an ECN feed. The feed and spreads you receive can vary on a myriad of factors including but not limited to the amount of money you have on deposit, your monthly and daily trading volume, your ability to negotiate the best feed for yourself, whether a broker runs an “A” book or “B” book, and more. In the futures markets this is something you don’t have to consider. There is a centralized exchange and only one market “aka spread” whether you are a bank, institution, High Frequency Trader or an intra-day trader. Everyone has access to the same bids and offers, no matter where you trade.
Speed, Performance, & Security
When trading currency or “FX” based Futures and Options markets you are using an electronic market place with many different market makers and market participants. Orders are matched and executed instantly and confirmed back to the customer. Hence there is no re-quote, second look or delayed executions because the other side is reconsidering the trade. Also, because a futures exchange clears the trade between the buyer and seller there is no counterparty credit risk. I have included a snap shot of a Chicago Mercantile Exchange “CME” rule highlighting this scenario.
Rule 522: Acceptance of Bids and Offers
What to Look for in a Liquidity ProviderGo to article >>
In open outcry and electronic trading, while outstanding, all or any part of any bid or offer is subject to immediate acceptance by any trader. Members are required to honor all bids or offers which have not been withdrawn from the market. The price at which a trade is executed shall be binding, unless such trade is cancelled by Exchange officials in accordance with Exchange rules.
What is the volume and liquidity for FX futures and options contracts?
CME FX markets trade over $100 billion in futures and options everyday with market makers that are required to provide bid and offers. Currency Futures and Options are a very liquid market.
Margin and Rollover Rates with Currency Futures?
Margin Rates with Futures are competitive and sometimes better than those using 50:1 leverage in the spot market. As an example to hold a position in the EUR/USD futures contract as of the writing of this article is $1,925 compared to approximately $2,500 for a standard lot in Forex.
We understand that Futures Margin can be difficult – please let us help you with any margin or minimum deposit questions you have.
What is the difference between an FX futures and Forex currency pair?
Currency based futures are standardized and grouped into the following (see below), the first being a standard contract which would be equivalent to a standard lot in FX (100K). There are also some E-micro contracts which would be equivalent to a mini lot in FX (10k). The Major FX futures are USD based with the exception of cross rate futures that are non USD. One important note that the CAD and Swiss Franc Futures are USD based (i.e. CAD/USD and CHF/USD in the futures and not USD/CAD USD/CHF as in spot FX).
- EUR/USD FUTURES CONTRACT = 125,000 EURO
- JPY/USD FUTURES CONTRACT = 12,500,000 JAPANESE YEN
- AUD/USD FUTURES CONTRACT = 100,000 AUSTRALIAN DOLLARS
- GBP/USD FUTURES CONTRACT = 62,500 BRITISH POUNDS
- CAD/USD FUTURES CONTRACT = 100,000 CANADIAN DOLLARS
- CHF/USD FUTURES CONTRACT = 125,000 SWISS FRANCS