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Trading Spot FX vs. FX Futures with IB?
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Trading Spot FX vs. FX Futures with IB?

  #1 (permalink)
Elite Member
Seattle, WA
 
Futures Experience: Intermediate
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Broker/Data: IB/IQFeed
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Trading Spot FX vs. FX Futures with IB?

Hey all,

As background, I've been trading an automated strategy through MultiCharts and IB on the equity index futures. I'm now trying to branch into forex. I'm working on a strategy that seems to backtest equally well on either the 6E future or the the EUR/USD FX spot. Assuming that I stick with IB as my broker, is there any reason to choose either the FX future versus the spot market?

Here's what I've seen so far:

1. The prices for the spot market and the future contract are nearly identical (just differing by random noise), and they trade during essentially the same hours.

2. They both have high volume. According to charts that I created using @EU# and EURUSD.FXCM from IQ Feed, the @EU# symbol tends to have somewhat higher volume. However, I'm not sure how accurate this is. (It seems that determining volume for the spot market is a bit of a "black art," since it's OTC and unregulated.)

3. It looks like my leverage would be roughly the same for either market. If I trade the 6E contract, the margin requirement is $3138 per contract (i.e., for controlling 125,000 euro). If I trade the spot market, my margin requirement is 2.5%, so a comparable trade of 125,000 Euro would require about a $4000 margin (assuming a total cost of $162,000).

4. It looks like commissions for the spot market would be somewhat higher, at least at lower volumes. The futures commission is about $2 per side per contract, including fees. A comparable purchase of 125,000 Euro on the spot would cost about $3.10 per side (assuming a total cost of $162,000 and 0.20 basis points). At higher volumes, though, the forex might be cheaper to trade.

Interactive Brokers fx commissions

(I know that the EUR/USD is typically traded in lots of 100,000, but I used 125,000 here for an apples-to-apples comparison.)

Given this, my instinct is to stick with the futures contract, particularly since I'm more comfortable with futures trading in general. However, if I've missed anything important, or if I'm way off base, please let me know!

By the way, I also noticed this thread with a similar question. It has some good information, but it veered a bit off-topic.

https://futures.io/brokers-data-feeds/24028-fx-futures-vs-spot-fx-interactive-brokers.html

Many thanks in advance!

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  #2 (permalink)
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  #3 (permalink)
Elite Member
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Xyzzy View Post
Hey all,

As background, I've been trading an automated strategy through MultiCharts and IB on the equity index futures. I'm now trying to branch into forex. I'm working on a strategy that seems to backtest equally well on either the 6E future or the the EUR/USD FX spot. Assuming that I stick with IB as my broker, is there any reason to choose either the FX future versus the spot market?

Here's what I've seen so far:

1. The prices for the spot market and the future contract are nearly identical (just differing by random noise), and they trade during essentially the same hours.

2. They both have high volume. According to charts that I created using @EU# and EURUSD.FXCM from IQ Feed, the @EU# symbol tends to have somewhat higher volume. However, I'm not sure how accurate this is. (It seems that determining volume for the spot market is a bit of a "black art," since it's OTC and unregulated.)

3. It looks like my leverage would be roughly the same for either market. If I trade the 6E contract, the margin requirement is $3138 per contract (i.e., for controlling 125,000 euro). If I trade the spot market, my margin requirement is 2.5%, so a comparable trade of 125,000 Euro would require about a $4000 margin (assuming a total cost of $162,000).

4. It looks like commissions for the spot market would be somewhat higher, at least at lower volumes. The futures commission is about $2 per side per contract, including fees. A comparable purchase of 125,000 Euro on the spot would cost about $3.10 per side (assuming a total cost of $162,000 and 0.20 basis points). At higher volumes, though, the forex might be cheaper to trade.

Interactive Brokers fx commissions

(I know that the EUR/USD is typically traded in lots of 100,000, but I used 125,000 here for an apples-to-apples comparison.)

Given this, my instinct is to stick with the futures contract, particularly since I'm more comfortable with futures trading in general. However, if I've missed anything important, or if I'm way off base, please let me know!

By the way, I also noticed this thread with a similar question. It has some good information, but it veered a bit off-topic.

https://futures.io/brokers-data-feeds/24028-fx-futures-vs-spot-fx-interactive-brokers.html

Many thanks in advance!

I too have been looking at the differences between Futures and Spot. I read a good book on this last summer (the book had a lean towards Futures because it is written by a Futures Broker): Carley Garner's book on trading currency in the Forex and Futures markets (Currency Trading in the Forex and Futures Markets: Carley Garner: 9780132931373: Amazon.com: Books). It has lots of detail on the various differences.

It will always come down to personal preference but I am leaning towards the spot markets due to the risk in the Futures that comes from fixed contract sizes. I run money management where my risk is 1% of my account (for example). Because IB (and Oanda) support units as opposed to fixed contract sizes, I can execute the right position size. That might mean that on a particular trade, given my account size and the stop required, I will want to trade $63K in currency. You could do this using futures with multiple mini contracts but the commissions and liquidity are not in your favor. You could also go with a Broker like FXCM that allow micro contracts as that gets you close enough to arbitrary unit sizing - but IB has better spread than FXCM. Futures contracts require you to size in their increments and therefore, if you are running a position sizing algorithm, it will be ineffective. You will either go too small thereby negating one of the purposes of position sizing (optimal bet size) or you will over shoot and take on a larger size (more leverage/risk) which will ultimately bite you on a bad trade. That is the risk I was referring to. Being required to take a non-optimal position size and over-doing it on a bad trade.

Just my 2 cents worth given that I've been looking at the same issue. I am using IB and NT right now but I am considering setting up a small test account with Oanda or FXCM.

-Dr. G


Last edited by DoctorGM; April 9th, 2013 at 12:09 AM.
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  #4 (permalink)
Market Wizard
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Sorry to post this in multiple places but there seem to be several threads discussing this issue, so in case people search and find the posts I'm posting the same reply in multiple (2or3) threads.

I don't trade FX but I've been researching it recently. One of the things that surprised me is everybody's fascination with bid/ask spreads and none of the other costs. Specifically the unseen cost there can be when trading Forex if you hold positions at all.

Last time I did this analysis the 6E Z/H futures roll was flat which is what you would expect given the interest rate parity. If you put this position on in Forex at Interactive Brokers though – somebody who advertises a lot about how great their bid/offers are, they are going to charge you a financing cost of 1.627% to buy USD-EUR and also a financing cost of 1.59% to sell it! (For positions less than $100k for large positions >$200M they still charge 0.59% and 0.62% respectively). Yes they charge you a financing cost whether you buy or sell it! Oanda on the other hand will charge you 0.325% to buy, and nothing to sell.

On some of the more exotic currencies, the bid/offer on the carry charge at Interactive can be as much as 5% (Czech/Danish/Israeli etc). If your holding a position for days or even weeks, the difference in those financing costs far outweigh a tiny difference in bid/ask or commission.

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  #5 (permalink)
NDioWealthAmp
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Would someone be able to comment on the spot FX liquidity (order book) at IB on largest majors (EUR/USD, GBP/USD) ? ideally, by posting screenshots of the typical orderbook taken from a live account, not demo

My brokers offer quality execution but limited liquidity and occasionally I now get liquidity slippage by one or two tenth pip (at worst case on both sides) so I am considering the issue

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  #6 (permalink)
Elite Member
Malaysia
 
Futures Experience: None
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Posts: 99 since Apr 2016
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OTC FX

Hi,

Spot I presume in this case is OTC rather that futures which is traded on the exchange. Just a few things to note:

1) the OTC market is very large, much larger than futures market due to institutional client requirements. eg. a large corporate in Japan would need to repatriate money back to their domiciled HQ for year end closing will need physical conversion of usdjpy or xxxjpy cross which the futures market is not able to provide. on top of that, institutional clients typically have hedging requirements for odd-dates which the futures market cant fulfill due to the fixed settlement dates unlike the forward market which is flexible.

1) in OTC market, only large banks active in FX have access to order book as clients will place it directly with banks - this is known as bilateral trading, so for banks trading with clients the biggest risk is credit risk unlike futures where the risk is with clearing house so there is no settlement risk.

2) only very liquid currencies with electronic platforms such as eurusd usdjpy usdchf or g7 predominantly have market depth, but again only visible to the big banks who need access to this liquidity via aggregators.

so, to answer your question short, there is no way for your broker who is not a bank to be able to furnish you depth of liquidity, order book (assuming they do not take the other side of your trade), or even volume data. even banks themselves do not release such information as it is proprietary and P&C as clients interest have to be protected especially in this environment of over regulation by central banks and regulators.

once you understand this, you will understand why it is difficult for your brokers to provide you with good fills especially during important events. unless you have a broker who specialise in FX and have strong system or some high frequency system in place to help execute - i have not done my homework yet, but i believe oanda does this quite well from feedback though i do not personally have an account with them.

i hope that clarifies.

thanks,
JT

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