Spot and Futures Forex Trading

[mik1973]

Would appreciate if someone could explain the main difference between Spot and Futures quotes (ie how figures are calculated between Spot and Futures quoted on FX).

Which of these figures are quoted by 'typical' brokers such as FXCM,Oanada etc is it the Spot or Futures?

I've had an account with Finspreads who offer two quotes one is the daily spot the other IMM (i'm assuming this is the future).

Is one figure more volatile than the other (and if so why?) or do they tend to fluctuate in line?

With reference to various B/O systems which is the most suitable figure to use.


Sorry if i'm covering old ground with these questions but i'm looking to implemement a trading strategy based on this information.

Cheers,
Mick

 

[JonnyT]

Hi Mick,

IMM is the interbank system and is not a future.
Spot is a market derived from the IMM but so called brokers effectively make there own markets like a spreadbet firm.

Currency futures are traded on GLOBEX (CME) and the EUR/USD is liquid with a 1 pip spread.

They do move together with a very close correlation.

JonnyT

 

[mik1973]

Hi Jonny,
Many thanks for your reply. This may sound a dumb question but any chance of you giving an idiots guide example of what GLOBAL(CME) is? I have heard this mentioned on these boards but really am not sure what this is. Is it some kind of trading platform such as IB?
Also, could you let me know if it would be possible to trade a typical B/O strategy based on data from FXCM. Do you consider their information to be a fair reflection of what is actual happening in the FX market.
Apologies if these sound dumb questions but i'm trying to find out as much as i can.

Cheers,
Mick

 

[JP1966]

I am sorry but Jonny T is wrong. The interbank market rarely uses the IMM contracts but trade spot between themselves. All futures contracts are derived from the spot market not the other way round.

The difference in rates is not a forecast of likely movement but instead a reflection in the interest rates of the 2 currencies. If you consider that the one year dollar depsoit rate is say 2.30% and the sterling one year deposit rate is say 5.20% then there will be a difference between the spot and the one year rates of exactly 2.90% or roughly 536 pips. If there is any difference then the inter-bank market would arbitrage the two. One of the reasons that banks rarely trade the IMM is because it is a future and so you have to manually work out what the equivalent spot rate is.

 

[mik1973]

Thanks JP,

Any chance of you giving a step by step example of how the 536 pips is derived at . Don't know if i've opened a can of worms here but i am interested in how these figures are calculated.
Is it safe to assume then that most brokers (including FXCM et al) use the 'spot market' to quote prices.
Are you also saying that the IMM rate is the futures quote?

Thanks,
Mick

 

[JonnyT]

As an individual the market choice is simple:

1) Globex futures - EUR/USD spread 1, fair market
2) Spot Market - EUR/USD spread 3+, broker makes the market

For other currency pairs then Spot is probably the way to go.

In general the futures are more volatile on news than the Spot market.

JonnyT

 

[JP1966]

All futures are by definition the spot rate, moved forward to the futures date. Let us say you are looking at a future with delivery exactly one year forward in dollar sterling. If you bought £ spot and sold dollars then you could put the sterling on deposit for a year at 5.20% and borrow one year dollars at 2.30%. Obviously if the future rate was the same then you could sell the £ one year forward at the same time as buying it spot and ensure no exchange rate risk and make 2.90% by lending at 5.20% and borrowing at 2.30%. To ensure no arbitrage therefore the futures rate will exactly reflect this difference in interest rates. so therefore the one year forward rate will be 2.90% lower than the spot rate -ie 2.90% of the spot rate of say 1.85 which equals the 536 pips.

If the futures market is ever out of line to the spot market then it would be possible to arbitrage the two and so rarely happens for longer than a second. The interbank market uses the spot market rather than futures for three main reasons. It is far bigger than the futures market and hence far more liquid. It is easier to see the real rate as there are no forwrd point calculations. Finally using futures requires margin - the interbank spot market is basically done on a trust basis and so banks do not have to post margin with each other.

 

[mik1973]

Thanks again to you both for your response. The example you gave of deposit and % is appreciated JP - makes things a lot more clear. In the example above the forward rate would be just short of 1.80?

Mick

 

[JP1966]

Yes.

The spot market is the foreign exchange rate quoted between all banks. The likes of FXCM and the other brokers replicate this as a market maker to retail and corporate clients. They are relatively new whilst the spot market has been around far longer than futures. All the future is is a forward spot price, changed by the interest differential. Various futures exchanges have tried introducing spot futres over the years but their attempts have always failed as banks prefer the current system to futures.

 

[mik1973]

JP,

Your explantion and examples have made things very clear and is much appreciated. From some of the comments i've read on other threads i have become a bit concerned about opening accounts with particular brokers. Do you have a preference of a particular broker (one who is reliable and honours correct stops?).
Most of these other platforms have the facilty to display charts and i was wondering if they tend to all follow each others buy and sell (to prevent arbing). I'm also looking for a platform which is portable-(in that i can log on via any computer without having to download software)- could you recommend any that meet this criteria?.

Thanks again.

Mick

 

[JP1966]

I don't think any broker will offer guaranteed stops in reality -if you know what you are doing you can't fail to make money - it is like being leaked the figures prior to the announcment. I know of one broker who has changd their websire in the last day or so to now say that fills are not guarnteed on announcements! The best I have come across is IG markets in London. They actually work your stops in the same way a bank would do for another bank. It means in a normal market there is always one pip slippage and after the figures last Friday there was 20 pip slippage. Considering the market gapped 100 pips I think that is fair. I have tried a lot of the firms and think they are essentially downright dishonest and nothing short of buckshops.

 

[TRADERguy]

Would appreciate if someone could explain the main difference between Spot and Futures quotes (ie how figures are calculated between Spot and Futures quoted on FX).

Which of these figures are quoted by 'typical' brokers such as FXCM,Oanada etc is it the Spot or Futures?

I've had an account with Finspreads who offer two quotes one is the daily spot the other IMM (i'm assuming this is the future).

Is one figure more volatile than the other (and if so why?) or do they tend to fluctuate in line?

With reference to various B/O systems which is the most suitable figure to use.


Sorry if i'm covering old ground with these questions but i'm looking to implemement a trading strategy based on this information.

Cheers,
Mick

Mick,



The spot price is the price deliverable in 2 days (1 day for USD/CAD). It is considered the immediate price. Futures are a form of forward contract that trades on an exchange, has a specified contract size, and has a set expiration date (usually in March, June, September, and December). Futures are a contract to buy or sell one currency for another at the specified date for the price that you agree to now. No money actually changes hands now except that you have to keep money with your broker to cover any losses that you incur; this is called margin but is a different concept than margin in stocks. For forex speculators (traders) who do not actually take delivery, your broker will automatically roll your spot position if you hold it overnight (through the New York close 5PM Eastern) and pay or take from you interest that is based on the interest rates in both countries. There is no interest in futures: the "interest" is already reflected in the price of the future based on the interest rates in the two countries and the amount of time until the contract expires. As the futures contract gets closer to expiration, the price will get closer to the spot price until they converge at the end. You should also understand that the futures price can vary slightly from the current spread to the cash in the short term based on short term factors of supply and demand and the liquidity present.



If the quoted prices for the spot and futures look completely different and not a few+ pips apart, it is because that particular currency pair is quoted in reverse order (the other currency first) in the spot than in the futures. To convert one to the other use the simple formula: 1/Price



The largest market is the interbank spot market at about $360 Billion a day. This is a decentralized market (no exchange) that banks and other large players use. The interbank spot market is open 24 hours a day from Monday morning in New Zealand till the close of business on Friday in New York. If you have at least $250,000 to play with you can participate on one of the smaller multi-bank platforms like Currenex.



FXCM, Oanda, etc are retail spot forex houses. They allow smaller players that can't trade the interbank minimum size of 1 million units of currency to have access to the spot market. But there is a price the customer pays for this access: retail forex houses take the other side of your trades and supply the prices you trade so there is an inherent conflict of interest.



IMM stands for International Monetary Market and is a division of the Chicago Mercantile Exchange (CME) that lists currency and financial futures. Globex is the name of CME's electronic trading platform. CME currency futures are less liquid than the interbank; especially during the European open which is the middle of the night in Chicago. Another disadvantage is that the exchange closes for an hour each day from 4pm to 5pm Central time. The advantage of CME futures is that you are trading against other market participants and not your broker. This eliminates the conflict of interest that is present in retail spot forex.



Hope this helps.

Cheers

 

[mik1973]

Trader Guy,

That is so good of you to provide so much information. The information you have all provided with reference to my initial question has been pretty much incredible. I think it speaks volumes for the people who contribute to this site. I hope that some day i will be in a position to offer advice and support in the way other members have assisted me.

Cheers,
Mick

 

[JumpOff]

Using Futures Volume to Trade Spot Market

Because the spot market isn't happening through a central exchange (the way futures are on the GLOBEX), there is no volume data. As a newbie, I assumed I was simply slow to find the proper data service, - it took me several weeks of searching for the volume data before I realised - it just wasn't there. (Ha! I just included that little bit of history to brighten your day and make you realise how far *you* have already progressed along this path).

I've read about traders using propriety code to calculate number of ticks per time frame, or ticks per bar size , or some such, but these are really volatility measures aren't they? It seems there are already many visual volatility clues to see on any chart.

So, I'm wondering, If the nearest EUR futures contract moves nearly in tandem with the underlying spot market, could one use the volume data from the futures data feed fill in that "blind spot" on the spot market data?

JO

 

[TGM]

Traderguy,

Very good job explaining forex. I am new to your board. So hello all. I am a trader in the states. I have traded currency futures for the past decade and I am looking at differant cash platforms. I will tell of all the demos I have done. The CME tends to run right with them and although you have to pay a few dollars commission. For a smaller speculators they can be better. By the time you pay a spread to someone like FXCM. Well i have found running them side by side that the merc will give you your price. Yeah, I have to pay commission. But on FXCM and Oanda I have to pay a wider spread.

Traderguy,
Since you know more about the cash then me. I have a couple questions for you. Out of all the demos for cash I have going. This company Saxobank seems to be the best. Do you know anything about them? They are a Danish group. They seem tip/top?

What kind of capital does it take to run EBS trader. Bloomberg is now offering this. I am no longer a Bloomberg subscriber. However, I heard EBS trader is "the" execution platform. Do you trade on this? Know anything about it?

Jumpoff,
The Cme now has market makers for the forex futures. A good trading friend of mine (I traded at both the Cbot and the CME for a while) was telling about a fellow trader who was hired by the merc to keep the spread tight and deep. He stands there and arbs it --to keep it tight. He is paid a salary and gets a bonus based on how tight he keeps it (he can also do some kind of scalping ---but Nothing unethical). There are several like him at the Merc (on all shifts). The system the Merc has put in place has been surprising liquid and effective. They should have done it 10 years ago. LOL

 

[TRADERguy]

Because the spot market isn't happening through a central exchange (the way futures are on the GLOBEX), there is no volume data. As a newbie, I assumed I was simply slow to find the proper data service, - it took me several weeks of searching for the volume data before I realised - it just wasn't there. (Ha! I just included that little bit of history to brighten your day and make you realise how far *you* have already progressed along this path).

I've read about traders using propriety code to calculate number of ticks per time frame, or ticks per bar size , or some such, but these are really volatility measures aren't they? It seems there are already many visual volatility clues to see on any chart.

So, I'm wondering, If the nearest EUR futures contract moves nearly in tandem with the underlying spot market, could one use the volume data from the futures data feed fill in that "blind spot" on the spot market data?

JO

JumpOff,

You can kind of, sort of, maybe, use CME futures volume data...sometimes. First pull up an hourly bar chart of the futures w/volume and make the chart large and the bars close together so you can see as many days as possible. You will see that volume is low during the beginning of the European session when actual forex volume is higher (even on a relative basis). So, when comparing volume you can only do it at similar times of the day when average volume is the same. I would also treat volume figures for the first few hours of the European session as an unreliable indicator because futures volume is so low that one large order by someone relying on the arb computers for a large fill can throw off any comparisons. The exception to this is using a lack of volume to confirm the idea that you might not want to trade at that time. If I'm just starting trading at 10 to 11am GMT and I see that only 3,000 instead of the usual 10,000+ contracts have traded, it gives me reason to be cautious. Also be aware that overall futures volume is significantly higher than normal in rollover months (March, June, Sept, & Dec) but can be smaller than normal for a specific expiration month on the couple of days during rollover when half the people have rolled and half have not.



Cheers

 

[TRADERguy]

Traderguy,

Very good job explaining forex. I am new to your board. So hello all. I am a trader in the states. I have traded currency futures for the past decade and I am looking at differant cash platforms. I will tell of all the demos I have done. The CME tends to run right with them and although you have to pay a few dollars commission. For a smaller speculators they can be better. By the time you pay a spread to someone like FXCM. Well i have found running them side by side that the merc will give you your price. Yeah, I have to pay commission. But on FXCM and Oanda I have to pay a wider spread.

Traderguy,
Since you know more about the cash then me. I have a couple questions for you. Out of all the demos for cash I have going. This company Saxobank seems to be the best. Do you know anything about them? They are a Danish group. They seem tip/top?

What kind of capital does it take to run EBS trader. Bloomberg is now offering this. I am no longer a Bloomberg subscriber. However, I heard EBS trader is "the" execution platform. Do you trade on this? Know anything about it?

TGM,

I have never used Saxo Bank. When I was first looking for a retail forex platform they didn't make my short list because their spreads were a pip or two wider than some others. That was a while ago so this may have changed. Also one very positive thing about them is that I can't ever remember anyone posting a negative comment about them on this and a couple of other forums.



EBS is the largest spot platform with about a third of the daily volume worldwide (about 130 Billion a day). They are very strong in the Euro and most other currencies but Reuters still has more volume in GBP, EUR/GBP, & AUD. In the past, I have watched the EBS price on Bloomberg while trading futures. It's very liquid and is what the big players watch but it's a fraction of a second delayed through Bloomberg even when you get it from them through a T-1 line. Banks can get it directly from EBS through EBS Live without the extra transmission delay. I don't know for sure, but everything I have ever read suggests that only banks can trade on EBS. You will not find the answer on their web sites; your best bet is to contact Bloomberg Tradebook through their web site and have one of their sales people call you. One thing to keep in mind is that they may not offer leverage (ask them). Here are some useful links:



http://www.elitetrader.com/vb/showthread.php?s=&threadid=34429&perpage=6&highlight=ebs&pagenumber=1

http://www.ebs.com/products/spot.asp?code=eu&

http://www.ebs.com/traderdemo/ebstonbbg_demo.html

http://about.bloomberg.com/about/professional/tradebook.html

http://www.ebs.com/pdf/MD%20Live.pdf

If you find that you can't trade with them, Currenex with clearing through Refco (called Refco Clear) is a very good interbank platform for smaller traders ($250,000 minimum account, usually a one pip spread for the EUR/USD, liquidity to handle 20 or 30 million position size, & leverage)

http://www.currenex.com/services/fxtrades.shtml?overview&

http://www.refco.com/ps/ps.refcoclear.asp

Other Interbank trading platforms are:

http://www.fxall.com/

http://www.statestreet.com/capabilities/trading_services/products/ts_073_fx_connect.html

http://about.reuters.com/productinfo/dealing3000/

EDIT- adding HotSpotFXi http://www.hotspotfxi.com/

Cheers,

TRADERguy

 

[TGM]

TRADERguy,

Thank you for the great info! It looks like there are quite a few pools of liquidity in the forex market. At one time, Reuters owned the show and now it seems there is quite alot of competition. Should be interesting

 

[Chris Hood]

Saxo: CAUTION

As said in another forum thread, we were taken in by Saxo's slick platform and promises only to find that it, like the worst of other retail dealers, beat us on spreads, orders, and fills. We got excuses like "misfeeds," etc., to explain why trades that would and should have been profitable were never filled.

 

[TGM]

GammaJammer,

Out of curiosity, what is the largest amount you have seen in a single transaction on EBS? Can you buy or sell a yard of EURUSD?