Foreign Currencies Trading

Since 1988

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Suite 515
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(800) 454-9572 USA
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Trade the Forex Market, the Currency Futures Market, and the E-Micro Forex Futures Market in one Platform.

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Currency Futures Library - Why Trade Currency Futures?

Overview

In 1972, CME transformed global finance with the launch of the first financial futures contracts via the newly organized International Monetary Market (IMM). Today, CME is the largest market for exchange-traded foreign exchange (FX) futures in the world.

If you currently trade FX (or forex) in the over-the-counter (OTC) market or on another venue, CME offers many advantages over those markets. At CME, trading transactions take place within an open, fair and anonymous trading environment. Individual traders, banks and hedge funds all have equal access to the same FX markets and prices.

An exchange environment, with its open and transparent market pricing, offers FX traders the opportunity to be involved in the process of price discovery, and provides other key advantages over "private" deals in the OTC market. If you trade OTC FX, it's time to look at CME FX futures. The innovative, online electronic accessibility, virtually 24 hours per day, combined with low trading costs and the backing of the CME Clearing House make CME a highly cost-effective, transparent and secure place to trade FX.

Market Integrity

Fair Markets, Open Access & Price Discovery:
CME is regulated by the U.S. Government via the Commodity Futures Trading Commission (CFTC). Integrity and openness are critical components of CME markets. Fair and transparent pricing, open access and the highest ethical standards are important criteria applied in managing CME markets.

Providing the highest integrity in CME markets is an important part of fulfilling a core CME Value, Customers come first.

Liquidity

More transparent than OTC spreads:
CME FX futures markets are supported by automated trading systems supplying continual pricing feeds from global FX market makers. These pricing feeds are real-time, dealable quotes, which allow CME to provide exceptional market liquidity and a dynamic trading venue for a large pool of FX fund managers, interbank spot FX traders, international asset managers, multinational corporations, speculators, day traders and retail investors.

If you trade on the OTC market, you may not really know the spread costs, which are built into the FX rate that you are quoted. Each time a quote is requested from an FX dealer in the OTC market, prices are produced for the interested counterparty alone. As a private deal, quotes are often five pips wide and are shaded to favor the dealer’s position, leading to price slippage. See the table below for an example of the value of a pip calculation. Skewed spreads are costly to the customer and difficult to detect, as the OTC customer often does not have access to the full range of market prices.

Value of a Pip Calculation

Sample OTC Rate OTC Trading Unit 1 Pip Cost of a 1 Pip Change in Price
British Pound 1,5556 US$ per Pound 1 million Pounds 0.0001 $100.00
Canadian Dollar 1,4895 CD$ per US$ 1 million US$ 0.0001 $67.14
Euro FX 1,0526 US$ per Euro 1 million Euros 0.0001 $100.00
Japanese Yen 120.00 Yen per US$ 1 million US$ 0.0100 $83.33
Swiss Franc 1,3904 Franc per US$ 1 million US$ 0.0001 $71.92

CME exchange-traded FX futures reduce the risk of quote slippage or dealer spread by providing tighter two-way live quotes, enabling traders to participate in price discovery in a transparent market. Futures prices often range from two to three ticks apart and market participants are able to both deal on and join the bid or offer price, thereby providing the trader with maximum flexibility and the best odds for optimal execution.

As a result of the position anonymity and market transparency provided by CME, market users trade on the best available public/published prices versus the OTC market system of private quotes, which may not reflect the best market price.

Superior Security

Security of the CME Clearing House behind all trades:
If you trade FX at another venue, you may not be aware of how important the guarantor and clearing method of a marketplace is.

As opposed to trading in the OTC market, CME FX futures offer the unparalleled backing of the CME Clearing House. The system of safeguards in place ensures that all parties involved in any CME FX futures trade will "make good" on their trade and protects traders from the possibility of default. This type of clearing guarantee generally is not matched at other non-exchange FX trading venues.

The CME Clearing House, backed by a financial safeguards package of approximately U.S. $3.4 billion, guarantees the clearing and settlement of trades in all types of market conditions. The CME Clearing House clears, settles, nets and guarantees all matched transactions in CME contracts. It marks all open FX positions to the market, at least twice a day, calling for payments from clearing members whose positions have lost value and paying clearing members whose positions have gained in value. The performance guarantee offered by the CME Clearing House enhances liquidity and virtually eliminates default risk for CME customers.

Flat Fees

Flat fees, with no hidden spread costs:
If you currently trade FX in the OTC market, you may be paying more than you think for your trades. At CME® you can see the costs up front. Spread costs on the OTC market could ultimately cost you more in your overall FX transaction, due to the non-transparent nature of OTC pricing. OTC trades are private deals that very often have a dealer spread in the quoted price—which ultimately increases your trading cost.

Full trading access to CME, the world’s most liquid FX futures exchange can be obtained by posting the necessary performance bond (margin) and payment of a flat CME clearing fee. In the OTC market, brokers make their livelihood by quoting wide bid/offer spreads in order to capture a pip or more of the price on every trade. Widely advertised as “commission-free trading,” these undisclosed deal spreads raise the cost of FX deals to customers.

Fully disclosed futures brokerage fees are a transparent, cost-effective execution pricing mechanism in comparison with the OTC approach. At CME, transactions are reasonably priced and costs are always fully disclosed.

Cost-Effective

Cost-effective exposure to FX market risk for up to three months without having to "roll" or refinance positions: It's cheaper and easier to manage your FX positions at CME. If you trade front-month FX futures contracts at CME, you may only be required to roll four times annually, due to contract expiration.

OTC customers trading spot markets must settle trades in one or two days. In order to extend the settlement date, positions may be “rolled” day to day, but the customer must pay a spread to the executing OTC dealer each time (see the example below).

Example: A currency position to sell U.S. dollars and buy Euro FX executed in the OTC spot market has a two-day delivery commitment, compared with a CME trade which, assuming the trade is done on a day exactly three months from the contract expiration date, has a delivery commitment of three months.

The OTC-executed Euro FX against the U.S. dollar position may also be kept for the entire three-month period. But, it is necessary for the OTC trader to roll or finance (also known as executing an FX forward swap) the position for any combination of time periods up to the three-month date. If the OTC customer chooses to do a daily roll, or tomorrow/next (T/N, Tom/Next), the position is refinanced every business day overnight period up to the three-month date. If the roll is for two weeks at a time, it would have to be executed approximately six times over the three-month period.

The OTC trade can also be executed spot and rolled once to the CME date. This makes it functionally equivalent to doing a CME trade where the cost of the roll (the interest rate differential between the two currencies) is included in the traded price of the Euro FX futures. However, even then a customer doing an OTC trade has to pay "spread" to the executing OTC dealer twice — once on the spot trade and once on the three-month roll (or swap) trade. This compares to executing directly on CME at your price, with no spread paid to an executing firm, only a futures brokerage fee. This alone makes CME FX futures attractive for FX transactions.

The bottom line is that every time an OTC position is rolled:

  1. The trader will pay a spread to the executing OTC dealer
  2. The interest costs of multiple short-term financings versus one three-month commitment are usually higher
  3. If the FX position is appreciating in value, the cost of the roll will probably go up. To understand this, let's look at our long euro/short U.S. dollar trade and assume that the euro is rising/dollar is falling. The cost of financing (or rolling) this position will be subject to supply and demand conditions within the roll market. You would need to pay to “borrow” the U.S. dollar at each roll, against the income from "lending" the euro amount you are long. As more market players accumulate the profitable long euro/short U.S. dollar position, it adversely affects the price of the roll: the demand (and cost) to borrow U.S. dollars increases, while the income from loaning euros decreases (with increased euro supply).

Rapid E-Trading

CME offers trading via the phone or on the CME® Globex® electronic trading platform:
All trading functions can be completed on a single screen via the CME's Globex Trader® front-end or through one of CME’s 17 authorized independent software vendors. These systems are offered to customers by many CME futures brokers. These systems enable users to view real-time quotes, track positions and execute transactions. Point and click dealing on the CME Globex platform provides speedy execution. Handheld trading devices, used by floor traders during open-outcry trading sessions, link the floor and electronic trading platforms and provide valuable market support.

Leverage

Leveraged exposure to FX markets:
CME provides access to margin trading for all market participants. All trades are booked(matched) through the CME Clearing House, ensuring complete trading anonymity and the absence of credit lines. The Clearing House eliminates counterparty credit risk as well as the need to trade within predetermined credit limits, a requirement in the OTC market. CME requires that traders of its products maintain performance bond requirements (as good faith deposits) to protect against trading losses. This requirement allows traders to use leverage in order to hold a position larger than their initial deposit amount.

Calendar Spreads

Simple execution of calendar spreads:
At CME, it is easy to execute spread trades. For example, a futures currency calendar spread, also known as an intra-currency futures spread, is an order for the simultaneous purchase and sale of futures contracts of the identical currency for different delivery months, with a price differential. Traders are able to roll their futures positions from one quarterly futures contract month to another active quarterly futures contract month, at any time.

Support

Trading and technical support: The CME Globex Control Center (GCC) provides registered users with 24-hour assistance that includes technical and customer support for the exchange’s Globex electronic trading system. CME customer support provides exchange users support via e-mail or telephone.


SOURCE: CME® (Chicago Mercantile Exchange®) publications: "Why Trade FX Futures." These publications are available in full upon request.

CME does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any product or investment strategy. All matters pertaining to rules and specifications for CME products are made subject to and are superseded by official CME rules. Current CME rules should be consulted in all cases concerning contract specifications.

Chicago Mercantile Exchange® and CME® are trademarks of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners.