Contents
- 1 Regulation of Futures Exchanges
- 2 Commissions and Fees
- 3 Where Can You Trade Currency Contracts?
- 4 Should You Trade Currencies on Exchanges?
Many Forex traders are familiar with the OTC/spot market for currencies, however, you are not limited to trading via your broker when it comes to the retail FX market.
There are various ways to trade currencies on existing exchanges. There are contracts on currency futures and currency options offered on several exchanges around the world. According to one of our polls, 15% of traders do their business via exchanges.
When you trade currency futures or options contracts on major exchanges, prices are fixed a little more consistently, and the transactions are cleared through clearinghouses. For some traders, this is desirable, since it makes things a little more âofficial.â
Regulation of Futures Exchanges
The regulation of futures exchanges is generally overseen by the country in which that exchange is located. In the United States, futures exchanges, including those that offer currency contracts, must adhere to the rules set forth by the Commodity Futures Trading Commission, as well as the guidelines presented by the National Futures Association. On top of that, many large exchange groups, such as the CME Group, have their own departments to regulate and clear transactions.
Around the world, different exchanges are subject to different regulations, but many of them try to maintain fairly high standards. Additionally, many adhere to Unified Trading System rules between exchanges that ensure that there is a certain amount of transparency between exchanges, as well as to provide international standards of operation.
The idea with exchanges is that there is a central marketplace â at least in one area â with standardized rules that can help protect the trader to a certain extent. There is no centralized spot/OTC Forex market; instead, you trade over the counter through your FX dealer. As a result, there is less regulation of FX when you trade outside exchanges.
Commissions and Fees
When you trade on a currency exchange, you will pay fees and commissions. Brokers receive commissions. Normally, with both options contracts and futures contracts you pay a transaction fee, plus an additional
When you trade in the regular retail Forex market, you do not have these same commissions and fees. Instead, FX dealers (brokers) make money through the exchange rate spreads. It is important to note, though, that you are often trading with the dealer as the other side when you engage in the spot foreign exchange market. When you trade futures or options contracts on an exchange, you might pay fees and commissions, but there is often more uniformity and transparency in the pricing, and no conflict of interests between you and broker.
Leverage is another point of difference. When you trade contracts on an exchange, you can use a modest amount of leverage to boost your positions. However, your margin account is quite closely monitored, and you will not be allowed the same amount of leverage that you can see with many FX dealers. With OTC Forex, you have an opportunity to use greater leverage, further magnifying your gains (and your losses).
Where Can You Trade Currency Contracts?
As you already know, the spot Forex market is the most liquid market in the world, and it has the highest volume. However, that does not mean that currency futures and options contracts are illiquid. Since these are derivatives based on a very liquid market, the currency instruments traded on exchanges are also very liquid, and trade at high volumes. It is just not quite at the same level as what is seen with the spot FX market. You might be surprised at the ability you have to trade currencies on some of the biggest markets. Here are some of the more
It is worth noting that many stock brokerages offer an option to trade currency options and futures contracts. As a result, it is possible to use a âregularâ investment account to trade contracts and futures, and as long as you meet the minimums required by the various brokers, you can trade. It is usually possible to trade on margin as well.
Another possibility for trading currencies on an exchange is to use currency ETFs.
Even if you trade currencies on an exchange in some way, it is still important to have a basic understand of how the currency market works, and what influences currency performances. While exchanges can provide some measure of increased protection, there is no substitute for knowledge.
Should You Trade Currencies on Exchanges?
You need to weigh the pros and cons of trading currency futures contracts and currency options contracts on an exchange. The main advantage to using an exchange is that there is regulation, so you have a measure of protection. On an exchange, the specifics of the contract, including size, price increment, and tick value must all be laid out so that you can figure out your position size and account requirements. It also makes it easier to see exactly what you face in terms of potential profit or loss, depending on how the price of the contract changes.
On the downside, you might not be able to use the amount of leverage you would like. Additionally, you might have higher equity requirements with an exchange than you would with a regular FX dealer. However, with the spot currency market, you might not be aware of the hidden transaction costs, while most
Consider your own goals and needs, and determine which would work for you. Or, if you prefer, you can trade both on an exchange and use a Forex dealer.
If you would like to learn more about trading Forex via regulated exchanges or if you want to share your experience of such trading, please feel free to do so using the commentary form below.
