features of two markets for currency trading

Interest in trading on the Forex market has grown significantly in recent years. Previously, private traders had to either trade quite large volumes of currencies through banks or trade futures contracts on exchanges such as the Moscow Exchange.

Many brokers now allow retail traders to trade currencies in spot foreign exchange markets in much smaller volumes, so traders need to understand the nuances of trading brokered spot currencies and foreign currency futures.

Since there are significant differences between trading currency futures and forex in the spot market, it makes sense for traders to learn about the characteristics, advantages and disadvantages of each of these markets.

Currency quotation

Each of the currency pairs quoted on the spot forex market has a standard quotation convention, so all currency traders know what the quotes they receive mean. The agreement is typically the number of units of the counter currency per unit of the base currency.

The base currency is the first currency in a currency pair, and the quote currency is the second currency in the pair. So, for example, for the EUR/USD currency pair, the euro is the base currency, and the US dollar is the quote currency.

Under this agreement, the standard interbank quote for the EUR/USD currency pair is usually US dollars per euro. The condition for quoting the USD/JPY currency pair is usually the number of Japanese yen per US dollar. Likewise, USD/CAD is the number of Canadian dollars per US dollar, and GBP/USD is the number of US dollars per pound sterling.

The quoting conventions of currency futures contracts are sometimes the opposite of those typically used by interbank forex traders, so it is important to know which pairs are swapped when comparing quotes between the two markets. In general, the Chicago Mercantile Exchange foreign exchange market lists all currencies in US dollars, so the futures contract will be quoted in US dollars.

The buy quote for GBP/USD currency futures contracts will be very similar to the interbank forex market quote for GBP/USD on the same delivery date. On the other hand, the Japanese yen quote against a US dollar currency futures contract will be the reverse of the normal interbank quote for USD/JPY.

The interbank quote for USD/JPY for delivery on the same date as the Chicago June futures contract could be 100.00, while the Chicago IMM June Japanese Yen futures contract quote would be similar to the inverse of that number or 0.0100.

To be able to compare interbank and futures market quotes, you must calculate the inverse quotes and divide the number 1 by the quote you want to invert.

date of delivery

Most currency transactions in the interbank market are carried out locally. This means delivery occurs two business days from the transaction date. Since currencies are traded in pairs, the spot date must be a business day in both currencies. All major currency pairs and crosses, with the exception of USD/CAD, are generally traded at spot prices.

Transactions occur when currency is delivered within one business day. This is the most common delivery period for USD/CAD transactions in the interbank market.

Forward contracts are also used when delivery is within two business days. Typical terms for a forward contract are 30, 60, 90, 120 and 360 days.

Swap contracts are entered into when a trader wishes to exchange one delivery date for another. Tomorrow Next swaps are especially common when forex traders need to move the delivery date of a position held overnight to the current spot delivery date.

Currency futures differ in terms of their delivery date from the above-mentioned forward contracts because their delivery dates are usually standardized and occur on a quarterly basis. For example, a futures trader might enter into a currency futures contract with a delivery date in March, June, September or December.

Trading volume

The forex market is the largest financial market in the world with major trading centers in London, New York and Tokyo. There are also additional significant trade volumes in Sydney, Auckland, Hong Kong and Singapore.

One of the significant differences between the forex market and currency futures is trading volume. Spot transactions traditionally account for the lion's share of foreign exchange transactions around the world.

In addition, the vast majority of foreign exchange transactions occur in the unregulated interbank foreign exchange market, where transactions are carried out through a vast telephone and electronic network between financial institutions and their customers.

In recent years, the growing availability of online forex brokers has made spot forex accessible to the masses. Retail traders who were previously unable to participate due to lower investment amounts can now trade forex with minimal margins using online brokers. However, trading volume in these foreign exchange transactions remains relatively small compared to what is observed in the interbank foreign exchange market.

Of all foreign exchange transactions, less than 10 percent are carried out on exchanges in the form of currency futures transactions. Most of the world's currency futures trading volume takes place in Chicago and occurs on the Chicago International Foreign Exchange Market, which is a division of the Chicago Mercantile Exchange, or CME. Other exchanges besides IMM CME that list currency futures contracts:

  • BM&F
  • DGCX
  • HKEx
  • SGX.

Currency pairs, transaction sizes and tick sizes

In the interbank foreign exchange market, transaction sizes can be almost any amount, but typically exceed $1 million to qualify for consideration quoted by most interbank market makers. Some banks and financial services companies provide quote services in smaller quantities to favored clients who typically trade larger amounts, as well as middle market clients of small corporations or high net worth individuals. Prices for smaller transactions are typically not as competitive, so trading spreads may widen significantly.

Interbank quotes for particularly large transactions over $50 million may also expand as the market maker can move the market for transactions of that size. The wider spread allows them to reduce some of the risk after agreeing to make such a significant trade for their client.

Almost any major financial institution with a foreign exchange department will offer pricing on virtually all major and minor currency pairs and crosses. Most will also offer prices for more exotic currencies quoted against the US dollar. In addition, the minimum tick size for most major currency pairs quoted on the interbank market recently decreased to 0.00005 from 0.0001, with the exception of USD/JPY, which decreased to 0.005 from 0.01.

In the retail forex market, which is usually available through online brokers, the standard transaction or lot size is 100,000 units of the base currency. However, since retail traders often want to trade the forex market in smaller volumes, transaction sizes can also be as small as a micro lot or 0.01 of a standard lot or 1000 units of the base currency. In addition, most brokers usually have a mini lot size available, which is 0.1 of a standard lot or 10,000 units of the base currency.

Currency futures contracts typically specify trading amounts or lots that vary depending on the specific currency pairs available for trading on a particular exchange for delivery on standard dates, usually quarterly. Additionally, exchange rates for currency pairs can vary by a minimum amount known as the tick size.

As an example of currency futures, the following table lists the current standard lot size, currency pairs, and tick sizes for traded CME currency futures:


The interbank foreign exchange market remains largely unregulated and operates between financial institutions and their clients, who may be located in different legal jurisdictions. However, this lack of regulation and transparency means that the quotes provided to clients by market makers and trading desks can differ significantly from exchange rate levels in the professional forex market.

In recent years, some steps have been taken to regulate transactions carried out by retail forex traders through online forex brokers. This was considered a necessary protection because these brokers usually deal with the general public who have not yet acquired sufficient professional experience.

So far, such regulation has focused on things like prohibiting hedges and curbing high leverage ratios. Despite these types of exceptions, the growing foreign exchange market still remains relatively unregulated outside of most jurisdictions. Some online forex brokers refuse to accept potential clients residing in regulated jurisdictions.

In contrast, trading in currency futures markets takes place on an exchange, which is usually heavily regulated by the financial regulator in the country in which it is located. This means that currency exchange rates and quotes must be in line with the current market. in which pricing is completely transparent to both clients and market makers.

Currency futures trading volumes are also recorded and can be viewed by analysts. The COT, or Commitment of Traders, report, released every Friday by the Commodity Futures Trading Commission, or CFTC, is a particularly popular tool for gauging market sentiment for forex traders.

Forex and futures: let's summarize

Traders who need to trade precise amounts might be better off trading the spot forex market with interbank counterparties or trading micro lots through online forex brokers. Essentially, if a forex transaction requires precise amounts of currency, the fixed denomination of the futures contract or contracts may not be sufficient or may exceed the required amount.

Most interbank and retail forex transactions are not subject to spot forex trading fees other than the quote spread. However, all forex futures transactions involve additional costs such as exchange and brokerage fees.

The price difference between the spot and futures markets can offer the currency trader somewhat modest arbitrage opportunities. Of course, they need to remember that here they will have to add or subtract the amount of the swap on the delivery date of the futures contract to the spot forex rate to calculate the comparable exchange rate between markets.

Some professional traders also use currency futures as a hedging tool. For example, some large traders and financial institutions buy or sell currency futures contracts against their spot and forward currency positions as a means of reducing market risk.

The trading hours for spot forex and currency futures are very similar now that electronic futures trading is available. Spot FX trades continuously from 5:00 pm ET on Sunday through 5:00 pm ET on Friday For CME currency futures traded through ClearPort Clearing, trading hours are Sunday through Friday from 6:00 pm to 5:00 pm ET . Please note that CME futures trading has a one-hour trading break beginning at 5:00 pm ET.