Spot Forex Versus Currency Futures

Many traders have made the switch from currency futures to spot foreign exchange (forex) trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Trading takes place over-the-counter directly between the two parties of a trade over the telephone and electronically. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.

The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EUR/USD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EUR/USD will rise just as Euro futures will rise. On the other hand, USD/CHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USD/CHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EUR/USD and "USD" in USD/CHF is the currency that is being quoted.