There are some people who claim that forex futures contracts are “better” than trading the spot forex market.
Let me break down these arguments.
They claim that futures contracts are traded on a centralized exchange vs spot forex which is not on a centralized exchange. Then they talk about how with forex different brokers can offer different pricing since there is no centralized, regulated exchange. Then they talk about how retail forex brokers can shade prices or widen them during the news. Some may even talk about retail forex brokers “stop hunting.”
It is true that spot forex is decentralized. It is true that spot forex pricing can be different across brokers. It is true that retail forex brokers can shade prices. It is true that forex brokers can widen spreads during news.
But the truth is illiquidity and widening of spreads can easily happen on a futures contract as well. Widening of spreads is not just limited to spot forex. Widening of spreads is typically associated and related to the fact that the market is illiquid and buyers and sellers are difficult to find. It is true that some retail forex brokers widen spreads during news above and beyond what is normal and keep them elevated for an extended period of time after certain news releases. I have seen it happen.
If that is the case then you don’t trade with that broker, or you can trade with that broker, just organize your strategy around avoiding such situations.
As a general rule the people who advocate forex futures are usually scalpers, or super fast traders that are just looking to grab a few tics from the market. If you are such a trader, then forex futures can be better for you since you may be able to get better spreads and more consistent pricing. There are a lot of arbitrage and scalpers in the forex futures markets.
In reality, the most money isn’t made from scalping or from arbitraging pricing on different platforms. The big money and most money is made from global macro trading.
A scalper may be trying to make 5 or 10 tics on the Eurofx futures contract. I don’t care about such movements. I care about catching the next 50 pip or 100 pip move in the EUR/USD spot market. I know that will make me far more money than trying to scalp a few tics off a futures contract. There is almost much more room for liquidity if you are capturing a 100 pip move as opposed to a 5 pip move.
Who cares if pricing is off by a tenth of a pip here, or half a pip there between different forex brokers. If you are scalping for 5 or 10 pips, then you may care about those things. But if you are looking for 50 pip or 100 pip or 500 pip trades, then you don’t care about that price discrepancy. Let the arbitrageurs and quant funds try to grab that tenth of a pip or half a pip between platforms.
When I make a 100 pip profit on a EUR/USD trade, I don’t care if I got a tenth of a pip or half a pip worse price on the entry and exit. Sure I would of liked to have gotten the best possible pricing, but I am not going to be a dick for a tic. I am not going to focus my efforts and energy on such problems. Instead I am going to worry about how to catch the next 100 pip or 500 pip move. I know that is going to make me far more money than trying to scalp 5 or 10 tics off the market.
As for forex brokers stop hunting, they don’t do that. They don’t have the capital available to do that.
Forex futures also is limited in how you can express trade ideas and macro views. There are not that many liquid currency futures contracts. With spot forex you can express a trade idea and macro view using the strongest and weakest currency that you believe in. If you believe the AUD is going to be the strongest and the JPY the weakest, then you can play it in AUD/JPY no problem. If you believe the EUR is going to be weakest and CAD the strongest, then you can express that view in EUR/CAD no problem. With currency futures, it is not that easy.
When Soros broke the Bank of England, he didn’t use futures contracts. He used the spot forex market. He sold a few billions worth of pounds and converted them into Deutsche Marks. I am sure that the pricing between various dealers in the spot forex market was off by a few pips. The pricing may have even been off by 5 pips or 10 pips or more between various forex dealers. He didn’t care about that. He was just looking for anyone to take the other side of his pound short trade. He wasn’t focused on the few pip price discrepancy between brokers. That was the last thing on his mind. He was focused on the global macro move.
Similarly I don’t focus on a tenth of a pip or one or 2 pip price difference between brokers. Instead I focus on capturing the next big global macro move.
Soros could of never amassed a $10 billion short position in currency futures contracts. It would of been impossible. There was no liquidity available for that. Instead he focused on the inefficiency and liquidity available in the spot forex market to express his trade idea and macro view and profited handsomely.
The spot forex markets today are just as inefficient as they were back in 1992, with much more liquidity to boot.
Forex Futures vs Spot Forex,