Forex vs. Futures

Size of Market. The spot Forex market is a $1.9 trillion daily market, making it the largest financial trading market in the world.   By contrast, about $45 billion of Forex futures contracts trade each trading day.   Forex futures trade primarily on the Chicago Mercantile Exchange ("CME") and the New York Board of Trade (on the FINEX division).  

Trading Hours.  The spot Forex market opens at 2:15 p.m. Sunday, New York time in Sydney and Singapore.  At 7 p.m. the Tokyo market opens, followed by London at 2 a.m., and finally New York at 8 a.m.  The markets remain open around the work until Friday afternoon at 5:00pm New York time.   Forex futures trade from 6:00pm Sunday through 5:00pm Friday New York time.

Commissions.  All financial markets have a spread (the difference between the bid and ask price).  In the futures market you are not only paying the spread, but you are also paying commissions and clearing and exchange fees.  By contrast, in the Forex spot market, you only pay the spread. 

Rollover.  In the futures markets, when the notice date passes, if you are long a contract, you can receive a notice that the counterparty intends to deliver the actual commodity or currency to you.  If you are short a contract, you will be required to make delivery.  To avoid this, most future contract holders close out their position before the notice date and purchase a distant active contract.  This is known as a rollover and requires attention and monitoring and incurs commission charges.   By contrast, in the Forex market, your positions are automatically rolled over daily thus eliminating costs associated with rolling over positions and the risk of delivery. 

 

Rollover Interest.  In the case of a spot Forex contract, the purchaser of the higher yielding currency is generally credited with interest on a daily basis.  The purchaser of the lower yielding currency is generally debited with interest on a daily basis.  By contrast, in the case of a Forex futures contract, the interest amounts are generally built into the trading price of the contract.

Terms.  A standard spot Forex trading lot is 100,000 in the base currency and is usually based on two-day settlement.  For example, the USD/JPY trades in $100,000 standard lots.  By contrast, each Forex futures contract has different specifications and settle during the pre-set settlement periods.

Number of Currency Pairs to Trade  Many online forex firms offer trading in 60 or more different currency pairs.  At the present time, 33 currency pairs trade on the CME.  Most currency trading involves the major currencies which are the U.S. dollar, the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar and the Canadian dollar and hence, both approaches (i.e., spot contracts and futures) are adequate for the needs of most traders.

Specialty Products.  One area where futures have a clear advantage is in specialty products.  One good example is the U.S. Dollar Index® (USDX) futures contract which trades on the New York Board of Trade.  The USDX contract calls for receipt/delivery of U.S. Dollars or receipt/delivery of six component currencies.  The U.S. Dollar Index is computed using a trade-weighted geometric average of six currencies.  The six currencies and their trade weights are: Euro -- 57.6%, Japan/yen -- 13.6%, UK/pound -- 11.9%, Canada dollar -- 9.1%, Sweden/krona -- 4.2%, Switzerland/franc -- 3.6%.  Hence, through the purchase or sale of one contract, a trader can gain exposure to 6 currencies.  To do this with spot or cash forex, a trader would need to execute 6 different trades.  

Notification of Trade Fills.  In the case of spot or cash forex, trades executed through an electronic platform are generally filled within 1-2 seconds and a trader can see the fill price almost immediately.  In the case of futures which are pit traded, a trade must first be routed through a broker who further routes an order to a floor trader at an exchange for execution.  In many cases, it can be several minutes until a trader has details on fill prices.  With the shift of more and more futures trades to electronic platforms such as CME's Globex system, this is becoming less of an issue.    

 

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