2010issue C0553
Currency futures versus forex on spread, margin, and micros
Editorial worksheet: convert every currency quote into implementation-cost, bind the loss with real margin and tick-value, then pick a listed contract size that still fits that bound.
- Retail forex marketed as commission-free commonly embeds a dealing-desk-spread of three to five pips, while listed currency futures typically quote a one-tick market with a $12.50 tick-value and bill commission separately.
- The archive treats those visible futures fees as usually smaller in total than the implicit cost of a three-to-five-pip dealing-desk-spread, so the comparison is implementation-cost.
- Margin-leverage as high as 100 to 1, and daily spot volume of more than one trillion U.S. dollars, are not treated as reasons to choose the over-the-counter desk. Leverage enlarges losses as well as gains, and the desk is not the interbank book.
- E-micro-currency-futures launched in spring 2009 are about one-tenth the standard contract, typically $10,000 to $12,500 notional, with a $1.25 tick-value on the micro euro versus $12.50 on the full-size contract and cash-settlement at expiration.
Commission-free is still a dealing-desk-spread
Retail forex marketed as commission-free commonly monetizes a dealing-desk-spread of three to five pips rather than a line-item commission. The markup is embedded in the bid and the ask.
On listed currency futures, the bid and ask are formed by the marketplace and are typically one tick. On most of the contracts discussed, that increment has a tick-value of $12.50. Commission and exchange-related fees are billed separately.
Implementation-cost is the all-in fill
Implementation-cost is the full price of getting filled, including visible fees and any width between bid and ask. The archive treats the visible futures fees as usually smaller in total than the implicit cost of a three-to-five-pip dealing-desk-spread.
Spot volume is not the retail book
Daily spot-currency volume of more than one trillion U.S. dollars does not imply that a dealing-desk retail account is interacting with that interbank book. The desk relationship can leave the account exposed to severe illiquidity.
A looser margin schedule is not a venue reason
Some forex brokers offered margin-leverage as high as 100 to 1, so a position could be controlled with about 1% of contract value. That leverage exceeds the leverage granted on the listed currency-futures venue discussed.
The same leverage that enlarges winning trades also enlarges losing trades. A looser margin schedule is not treated as a sufficient reason to choose the over-the-counter venue.
Options lack a shared multi-leg path
Futures options can be worked as a multi-leg-options-order in the open-outcry pit alongside electronic options. Spot-forex options are described as lacking that multi-leg execution path.
Forex options may include U.S.-style, European-style, and other exotic structures. Wide bid/ask spreads are identified as a liquidity disadvantage.
E-micro-currency-futures resize the listed ticket
E-micro-currency-futures launched in spring 2009 are about one-tenth the size of the standard contracts. Typical notional value is $10,000 to $12,500. The micro euro has a $1.25 tick-value versus $12.50 on the full-size contract.
Those contracts use cash-settlement at expiration, so the account is marked in cash rather than taking delivery of the currency. Expiration settlement is described as often unfavorable.
TradersWeek editorial: after the loss is bound by margin and tick-value, the listed choice is the contract size that still fits that bound, including the smaller e-micro-currency-futures ticket when the standard size does not.
All readings on this track · 25 readings
- 1988When action-seeking replaces the decision process
- 1997Convert a market story into a testable decision process
- 2004Posted margin as the scarce input of an option-income write
- 2004Capping futures leverage to intended share exposure
- 2005Currency execution costs hide in spreads and margin
- 2006Daily margin as a leverage filter
- 2006A commodity sleeve is a contract-design choice
- 2007Bounding futures risk with stops, trails, and margin
- 2010Currency futures versus forex on spread, margin, and micros
- 2010Enforced margin as the real futures trade guarantee
- 2010Choose mini or standard futures before the first fill
- 2012Segregated margin is an incomplete exposure filter
- 2013Posted tickets hide margin and fill gates
- 2013Portfolio margin calls versus pair-hedge leverage locks
- 2015Forex execution checks for fills, margin, and leverage
- 2015Cheaper margin is not a currency leverage edge
- 2015Cheap daytrading margin is not a risk discount
- 2016Futures liquidity filter with equal-dollar size and effective margin
- 2016Cap futures leverage before margin turns into debt
- 2016Gold option income as a margin-sizing problem
- 2017Electronic matching changed what a futures account could carry
- 2018Broker margin-upcharges can force an option-income exit
- 2019Inspect execution cost and margin bounds before cycle timing
- 2020Treat automatic futures gearing as a pre-entry filter
- 2020Equal-dollar futures liquidity and an effective margin screen