Forex vs. Futures

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 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. OEC FX currency trading gives the customer one rate all the time, day and night. While these FX margins are smaller relative to the futures contracts, this increased leverage means a relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit; this may work against you as well. Increased leverage also increases the level of risk.

• Forex trades executed through OEC FX are commission free.

  Your only transaction cost is the dealing spread - the difference between the bid and the ask price.

  When trading forex at OEC FX, you'll only pay the bid/ask spread, Futures traders 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. OEC FX does not charge commissions. Prices are quoted in terms of bid/ask spreads. The cost of doing the transaction, as well as OEC FX's compensation, is inclusive within a spread quote, which are Interbank dealing spreads (or less) on all major currencies, including U.S. Dollar, British Pounds, Japanese Yen, Swiss Franc, Canadian Dollar, and Australian Dollar.

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.