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Forex:
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.
- 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 are ofetn 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.
If you are
interested in trading currencies online, you will find that
the Forex market offers several advantages over equities
trading.
24-Hour
Trading
Forex is a
true 24-hour market, which offers a major advantage over
equities trading. Whether it's 6pm or 6am, somewhere in the
world there are always buyers and sellers actively trading
foreign currencies. Traders can always respond to breaking
news immediately, and P&L is not affected by after hours
earning reports or analyst conference calls.
After
hours trading for U.S. equities brings with it several
limitations. ECN's (Electronic Communication Networks), also
called matching systems, exist to bring together buyers and
sellers - when possible. However, there is no guarantee that
every trade will be executed, nor at a fair market price.
Quite frequently, traders must wait until the market opens the
following day in order to receive a tighter spread.
Superior
Liquidity
With a
daily trading volume that is 50x larger than the New York
Stock Exchange, there are always broker/dealers willing to buy
or sell currencies in the FX markets. The liquidity of this
market, especially that of the major currencies, helps ensure
price stability. Traders can almost always open or close a
position at a fair market price.
Because of
the lower trade volume, investors in the stock market are more
vulnerable to liquidity risk, which results in a wider dealing
spread or larger price movements in response to any relatively
large transaction.
Profit
Potential In Both Rising And Falling Markets
In every
open FX position, an investor is long in one currency and
short the other. A short position is one in which the trader
sells a currency in anticipation that it will depreciate. This
means that potential exists in a rising as well as a falling
market.
The
ability to sell currencies without any limitations is another
distinct advantage over equity trading. In the US equity
markets, it is much more difficult to establish a short
position due to the Zero Uptick rule, which prevents investors
from shorting a stock unless the immediately preceding trade
was equal to or lower than the price of the short sale.
Foreign
Exchange (FOREX) or Currency Trading
U.S.
& International Markets: Futures and Options
| Market |
Exchange |
| |
|
| Australian
Dollar futures & options |
IMM |
| Benzene
futures |
CME |
| British
Pound futures & options |
IMM |
| British
Pound (MIDAM) futures |
MA |
| CRB
Index futures & options |
NYFE |
| Canadian
Dollar futures & options |
IMM |
| Canadian
Dollar (MIDAM) futures |
MA |
| Cattle,
Feeder futures & options |
CME |
| Cattle,
Live futures & options |
CME |
| Cattle,
Live (MIDAM) futures |
MA |
| Cocoa
(Metric) futures & options |
CSCE |
| Coffee
futures & options |
CSCE |
| Copper
futures & options |
COMEX |
| Corn
futures & Corn options |
CBOT |
| Corn
(MIDAM) futures & Corn (MIDAM) options |
MA |
| Cotton
futures & options |
NYCE |
| Crude
Oil, Light/Sweet futures & options |
NYMEX |
| Crude
Oil, Sour futures & options |
NYMEX |
| Dow
Jones & Dow Jones options |
CBOT |
| Dow
Jones Mini $5 multiplier |
CBOT |
| Dow
Jones Mini Index $2 multiplier |
CBOT |
| Euro
FX futures & options |
IMM |
| E-mini
Euro futures & options |
IMM |
| Eurodollar
futures & options |
IMM |
| Eurodollar
(MIDAM) futures |
MA |
| Euroyen
futures & options |
IMM |
| Gasoline,
Unleaded futures & options |
NYMEX |
| Gold
(Kilo) futures |
CBOT |
| Gold
(100 oz) futures & options |
COMEX |
| Gold
(MIDAM) futures & Gold (MIDAM) options |
MA |
| oldman
Sachs Comm. Index futures & options |
IOM |
| Heating
Oil futures & options |
NYMEX |
| Hogs,
Lean futures & options |
CME |
| Hogs,
Lean (MIDAM) futures |
MA |
| Japanese
Yen futures & options |
IMM |
| E-mini
Japanese Yen futures & options |
IMM |
| Japenese
Yen (MIDAM) futures |
MA |
| Lumber
futures & options |
CME |
| Mixed
Xylene Futures |
CME |
| Mexican
Peso futures & options |
IMM |
| Municipal
Bonds & Municipal Bonds options |
CBOT |
| NASDAQ
Index futures & options |
IOM |
| NASDAQ
100 E-mini futures & options |
IOM |
| Natural
Gas futures & options |
NYMEX |
| Nikkei
225 Stock Index futures & options |
IOM |
| NYSE
Index Composite futures & options |
NYFE |
| Oats
futures & Oats options |
CBOT |
| Oats
(MIDAM) futures |
MA |
| Orange
Juice futures & options |
NYCE |
| Palladium
futures & options |
NYMEX |
| Platinum
futures & options |
NYMEX |
| Pork
Bellies, Frozen futures & options |
CME |
| Rough
Rice futures & Rough Rice options |
CBOT |
| S&P
500 Index futures & options |
IOM |
| E-Mini
S&P 500 futures & options |
CME |
| S&P
MidCap 400 Index futures & options |
IOM |
| Silver
futures & options |
COMEX |
| Silver,
New futures & Silver, New options |
CBOT |
| Silver,
New York (MIDAM) futures |
MA |
| Soybean
Meal futures & Soybean Meal options |
CBOT |
| Soybean
Oil futures & Soybean Oil options |
CBOT |
| Soybeans
futures & Soybeans options |
CBOT |
| Soybeans
(MIDAM) futures & Soybeans (MIDAM) options |
MA |
| Sugar
futures & options |
CSCE |
| Swiss
Franc futures & options |
IMM |
| Swiss
Franc (MIDAM) futures |
MA |
| Treasury
Bills (90 day) futures & options |
IMM |
| Treasury
Bills (MIDAM) futures |
MA |
| Treasury
Bonds futures & Treasury Bonds options |
CBOT |
| Treasury
Bonds futures & Treasury Bonds options |
MA |
| Treasury
Notes, 10 year< & Treasury Notes, 10 year
options |
CBOT |
| Treasury
Notes, 5 year & Treasury Notes, 5 year options |
CBOT |
| US
Dollar Index futures & options |
NYCE |
| Value
Line Index futures & options |
KCBT |
| Value
Line, Mini futures & options |
KCBT |
| Wheat
futures & Wheat options |
CBOT |
| Wheat,
Hard Red Winter futures & Wheat options |
KCBT |
| Wheat,
Hard Red Spring futures & Wheat options |
MGEX |
| Wheat
(MIDAM) futures & Wheat (MIDAM) options |
MA |
International
(non U.S.) Futures and Options
| Market |
Exchange |
| |
|
| 3
Month Euribor & 3 month Euribor options |
MATIF |
| 90
Day Australian Bill & 90 Day Australian Bill
options |
SFE |
| CAC
40 Index futures |
MATIF |
| Aluminum
futures & options |
LME |
| 1
Month Euribor futures |
Eurex |
| 3
Month Euribor futures & 3 month Euribor options |
Eurex |
| Euro-Schatz
futures & Options on Euro-Schatz futures |
Eurex |
| Euro
BOBL futures & Euro BOBL options |
Eurex |
| Euro
Bund futures & Euro Bund options |
Eurex |
| Euro
BUXL (long bund) futures |
Eurex |
| Conf
Swiss Bond futures |
Eurex |
| DJ
Stoxx futures |
Eurex |
| Finland's
FOX index futures and Fox Options |
Eurex |
| Nemax
50 index futures and Nemax50 Options |
Eurex |
| Euro
Notional Bond futures & Notional Bond options |
MATIF |
| Euribor
Interest Rate futures & options |
LIFFE |
| Euroyen
futures & options |
SIMEX |
| FTSE
100 Index futures & options |
LIFFE |
| Hang
Seng futures & Hang Seng options |
HKFE |
| Italian
Bond (BTP) futures & options |
LIFFE |
| Long
Gilt futures & options |
LIFFE |
| Nickel
futures & options |
LME |
| Nikkei
Index futures & options |
SIMEX |
| All
other LME contracts |
LME |
| Sterling
futures & options |
LIFFE |
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Consulting
AR LTD
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