I’ve heard a lot and have been discussed a lot about Futures contract and Spot Forex. A lot of people try to argue that futures contracts are much “better” than Spot Forex. The term “better” here could interpreted in a way that it’s easier and more transparent to trade with. In this article, I’ll try to break through the argument.
People said that futures contracts are traded on a centralized exchange but likewise spot forex is not being traded on a centralized exchange. People talk about the “shaving” “shady” activities made by brokers since there is no centralized exchange and also regulated exchange. People talk about how broker profit from event such as news to widen spread or even to catch stoploss. Those who talk to me use such argument to talk down spot forex not to be traded with and there’re little way to profit unless you are a broker.
It’s correct that spot forex is decentralized market. From what I’ve seen, pricing is also a little bit different from broker to broker; and out there, there’re a lot of shady brokers with no real information who take advantage of trader to benefit themselves when they shading price and widen spreads or even take out stoploss when price isn’t reached there yet.
But the thing here to talk about is illiquidity and widening of spreads happened and currently happening a lot in futures contrack as well. First, we need to understand why spread is widening. Spread widening happened when there’s illiquidity in the market where there’re little sellers and buyers. That’s why we see spread in spot forex often higher during Asian market.
Forex futures has better spreads and more consistent pricing from what I see, therefore if you are a scalper or a short-term trader, forex futures could be your choice since a few pips could make such a difference. Most of my friend are arbitrage and scalpers in forex futures market and they are doing well since pricing is so consistent.
But the fact is that scalpers or super fast trading are not where the big money at. They are just a small swing that is a plafrom a big swing that is concurrently happening. I wonder why they are looking for 5 pips instead of 500 pips without much of that headache.
Scalpers may be trying to catch 5 ticks on Euro Futures Contract but I’m here to catch 50 pips on EUR/USD spot market. And for me, 0.5 pip of spread difference doesn’t really matter because I’m there for 50 pips, not 5 pips. As for 50 pips move, you’ll have more room for liquidity to play out rather than 5 pips move. For 5 pips move, a sudden swing could wipe you out. I’ll happy to let the arbitrageurs and quant funds try to grab that tenth of a pip or half a pip between platforms.
There’re theory about forex brokers do stophunting. I believe that they don’t do do that since they don’t have the required capital to do that. People who are doing stop-hunting are real traders, big traders or our competitor, they have to catch retail traders stops to benefit themselves and to send out a telegram to other big traders that they are actually stop-hunting and ready to move in another direction.
Remember the time when George Soros broke the Bank of England, he didn’t use futures contracts. He used the spot forex market. George Soros sold a few billions worth of pounds, profiting from the UK government's reluctance to either raise its interest rates and then converted them into Deutsche Marks. At that time there are also difference of pricing from broker to broker. But do you really think that he would care about it. He’s in there for the long-hunt and made a fortune and a few dollars difference won’t affect such a fortune. A little off spread cents wouldn’t have any significance either
Therefore I believe a few pip difference difference in pricing doesn’t really affect anyone performance since the moves are all the same.
I believe during the Soros time, in 1992, the spot forex markets are just as inefficient as today, with much more liquidity to boost. Therefore for those of you think futures contracts are “better” choice, please think it over.
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