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The Currency Futures Manifesto
There is a specter haunting the Euro. And the GBP, CHF, and JPY in the cash/spot FOREX markets – the specter of many unscrupulous brokers who allegedly:
- Freeze out traders during news events
- Give fills at prices not at the trader’s order
- Worse yet, actually contrive the currency pair price arbitrarily (check with different brokers at different times – you’ll be surprised at the variance)
- Give one data feed for demos, suckering in the newcomers with favorable setups – and giving them quite a different feed when they start trading real money
- Actively trade against their clients
- Force some of the more successful clients to go through manual execution on their trading desk, thereby delaying trade executions
- Give the illusion that you are trading against other currency traders. Nonsense. In many cases, you are only buying and selling currency reserves at that bank.
- Thus, some of these “brokers” have accused traders of “stealing,” because they trade the news, and walk away with 50+ pips in a few short minutes. Think about it – if they were really an impartial “broker,” they would only care about their fees, not if you won or lost. The mere accusation of “stealing” implies you are unfairly taking their money. That alone is evidence you are trading against the broker/bank, not other traders.
There is another alternative, and I believe I have found it to be better. I have turned to the currency futures market from the Chicago Mercantile Exchange (CME). Here’s what the CME has to say about the Over-The-Counter (OTC) FOREX spreads:
“If you trade on the OTC market, you may not really know the spread costs, which are built into the FX rate that you are quoted. Each time a quote is requested from an FX dealer in the OTC market, prices are produced for the interested counterparty alone. As a private deal, quotes are often five pips wide and are shaded to favor the dealer’s position, leading to price slippage. … Skewed spreads are costly to the customer and difficult to detect, as the OTC customer often does not have access to the full range of market prices.
“CME exchange-traded FX futures reduce the risk of quote slippage or dealer spread by providing tighter two-way live quotes, enabling traders to participate in price discovery in a transparent market. Futures prices often range from two to three ticks apart and market participants are able to both deal on and join the bid or offer price, thereby providing the trader with maximum flexibility and the best odds for optimal execution (emphasis mine – it means you can either buy or sell on both the bid and the offer, not just take what a FOREX broker gives you – and also, I usually notice the tick spread to be only one tick during liquid trading times).
“As a result of the position anonymity and market transparency provided by CME, market users trade on the best available public/published prices versus the OTC market system of private quotes, which may not reflect the best market price.” http://www.cme.com/edu/trd/fx/trdfxcme1569.html
What this means to me, is that trading the futures currency market, instead of the private intrabank FOREX, means everyone gets a chance at the same price, no private deals. Price is transparent, so no monkeyshines or contrived prices. Also, the spread is far lower – I usually only see more than one tick spread during off-hours, or for a brief second or two during the trading day.
But what about commissions? There’s no commissions in the spot FOREX market, right? Wrong. When you go in on a trade, you will pay a 3 – 5 pip spread. When you enter long, you are already down anywhere from $24 -- $50 on a full contract! And that’s only for one lot! Imagine instead only being down $12.50 (the price of a pip/tick in the futures market), and a discount broker’s commission of $2.75. As the CME puts it:
“In the OTC market, brokers make their livelihood by quoting wide bid/offer spreads in order to capture a pip or more of the price on every trade. Widely advertised as “commission-free trading,” these undisclosed deal spreads raise the cost of FX deals to customers.”<o></o>
If your FX broker tries to make a big deal out of their “no commission” fees, they are being less than honest. (What else are they not being honest about?) Technically, no commission is charged, but when your fees end up being double or triple what a commission is on a commissioned exchange, give me the commission any day. Let me ask you this: how many people would be excited about getting in on a trade that had upfront fees of $50?
Cash (spot) FOREX brokers are virtually unregulated. Even if they are members of the NFA or the CTFA, they are not bound by any meaningful regulations. The futures market, on the other hand, is strongly regulated, and keep records on all their brokers. You can research any futures broker you want on their website to see if they have had client accusations brought against them, even if they were cleared.
Some spot FOREX brokers lie and tell you that the currency futures have more expensive transaction costs. Wrong – at least from a discount futures broker. Again, futures currency brokers have to give you the quote from the central exchange, the CME, so everyone gets the same price. And, it’s not difficult to find a futures broker who will give you a commission of less than $5.90 round turn (meaning getting both in and out of the trade) per contract/lot. Do the math: 5.90 commission + 12.50 tick spread (in most cases – you have to watch to be sure) = $18.40 for your trade, and this includes How is that more than the costs of a spot FOREX trade of 3 – 5 pips?
Some spot FOREX brokers lie and tell you that the currency futures don’t trade 24 hours. It’s my understanding that they trade 23 ¾ hours. Good enough?
So here are the reasons I left the cesspool of cash (spot) FOREX “brokers” behind:
- Lower fees are the main reason I started trading currency futures. It’s not easy to scalp when I start out $40 in the hole
- I could not get fills during news trading. Not a problem yet on the currency futures (nor have I heard complaints about this from other currency futures traders).
- The third reason is I began to become informed about just how crooked many of these so-called spot FOREX “brokers” are. Once I got wise to how a “bucket shop” works, there was no turning back. I can’t deal with dishonest people. If you lie down with the devil, you wake up in hell.
- Fourth, my trading platform opened up access to new markets to me. Once I started trading currency futures, I got exposed to such things as the “Emins …”
Now, I do not wish to give the inference that all retail intrabank FOREX brokers a crooked. For example, I have heard good things about Amp Forex, Oanda, and Interactive Brokers. But given the choice, at least at Amp and IB, I would rather have a futures account and trade currencies, than a FOREX (spot) account. Futures still offer the best opportunities for the informed trader.
There are some differences. Currency futures don't trade currency pairs, they trade the currency. Period. You trade the future of the Yen, not the USD/JPY. You trade a contract on the future of the Pound, not the GBP/USD. It took a little getting used to. But it has been my experience that if the currency future market doesn't closely mimmic the spot directly, it does so inversely. In other words, If the CHF dives in the spot, it probably rises commensurately in the "6S" future. That, and the leverage is different. Those were about the biggest things that struck me.
There are some drawbacks to futures trading. For instance, if I was one of those idiots who trades without stops, it would be possible for me to lose more than what was in my account. Yes, the broker will probably close your trade before it reaches that point, but it has happened that people have had to send their brokers a check after wiping out their account. Only the foolish trade without solid stops – and I don’t mean stop limits. Anyone should papertrade the futures before commiting to it.
<o>And remember, this whole story is for educational purposes only, it is not trading advice or an offer or solicitation for the purchase or sale of any financial instrument. You can lose a lot of money trading futures, even more than you invest. You must understand trading and futures before you place a trade. Futures and forex trading involves a certain degree of risk, and may not be suitable for all investors. Derivative transactions, including commodities, are complex and carry the risk of substantial losses. Past performance is not necessarily indicative of future results. You should only trade with risk capital. </o>
Currency traders of the world unite! Join the futures market! You have nothing to lose but excessive fees!
Well, there it is. Comments?