Do futures traders do better than currency traders?

Published on: October 28, 2019

Over the years, we’ve answered thousands of traders’ questions. We’ve decided to make the answers public, so that everyone can benefit from them. This question is from someone considering Jigsaw:

In your experience, do futures traders do better than currency traders?

It always seems to be futures or stock traders that do well. I haven’t seen many successful stories or AMAs on Reddit from Forex traders.

I try to look at currencies with auction market theory in mind. Where does the market find value? What happens when the market moves away from a value area? What happens when the market approaches a value area? and so on, but in the currency markets you can only get a rough idea where these areas are, whereas in futures you know the volume and can see real volume profiles.

This is a weighty topic, so we’ll focus on fairness, visibility and fragmentation.

Fragmented Markets

When you trade an instrument, you are trading that instrument on an exchange. A fragmented market is one that is traded on many exchanges. Forex is the most fragmented market. From the big banks right down to the corner exchange, a currency pair can be trading on many thousands of exchanges at the same time. As such, there’s no common price for Forex, different people can quote different prices.

Stock markets are the second most fragmented. Mostly that applies to the US where NASDAQ is a series of exchanges. With NASDAQ the exchanges are linked electronically but there can be price discrepancies which is where the concept of “latency arbitrage” comes in – the ability to trade a price discrepancy between 2 exchanges because one’s a bit behind, it’s one of the better known HFT strategies. Note also, there are some NASDAQ stocks that trade off NASDAQ (mostly in London)

Futures are not fragmented. Each instrument is traded on a single exchange, there’s one price and it’s visible to all.

Visibility

The ability to see the flow of trade gives you an additional dimension in making decisions. Forex is a low visibility market. In fact, many forex trades don’t even make it to an exchange (see fairness), you can’t see bids/offers/trades/volume/volume profile for the forex market. Some brokers do show bids and offers but it’s local to just their customer base, so not indicative of the larger market.

Stock markets have a visibility issue. There are feeds that show you the entire order book BUT it does not show dark pools, which came about as a response to predatory HFTs. Dark pools allow trading that you can’t see. It’s not a huge issue for traders but it does mean you aren’t seeing all activity. In practice this means you have to pay more to see more activity and even then some is hidden.

Futures all trade on a single exchange – we all see what everyone else sees, every trade is reported and there’s no dark pools.

Fairness

This is where it gets sticky. In Forex, there’s very little regulation. Most forex brokers don’t send your order to an exchange, they just take the other side of your position. In other words, your forex broker (most, not all), only makes money when you lose, they also lose money when you win. That means they have an incentive to ensure you lose. That’s why you see re-quotes and off shifts in price because, as there’s no central exchange – they can also quote whatever price they like. They do basically keep prices in line with bank prices because to do otherwise would attract arbitrage traders. The upshot is though, most forex brokers need you to lose your money so they can make theirs. There are brokers that will put your trades to an exchange but the whole industry is unregulated both in terms of the brokerages themselves and the promises vendors can make about forex based services.

Stock and Futures are both well regulated. With stocks (especially with $0 commissions), there’s a high chance an HFT firm is buying your order and using that information to refine their strategy. Think of it like a stealth tax on your trades. The upside with stocks this is that it does bring in liquidity but it also causes little ‘flash crashes’ when HFT activity pulls liquidity – quite often through a software glitch. It’s hard to say if the upside of additional liquidity is adequately offset by the stealth tax but my personal gut feel is that it is. The bottom line though is your broker sells your orders, so that someone can profit from them.

Futures markets are very well regulated and brokers make money throughtransaction fees and not through selling your order flow, which to my knowledge is not yet a thing in Futures markets.

Conclusion

It’s clear to see why people struggle in Forex markets – poor visibility and trading against your broker. In terms of stocks vs futures, they seem about the same in terms of fairness but Futures win in terms of giving you more complete information for your decision making. One other upside of Futures is the fact there are fewer markets. Many intraday stock traders spend time researching which stocks will be ‘in play’ that day – there’s thousands of stocks on NASDAQ and you have to be selective about which to trade on any day. With Futures, there’s a narrow range of markets and the popular markets are effectively  ‘in play’ most days.

One final consideration is margin. With equities you can trade just 1 or 2 shares as a beginner and risk a very small amount. Futures are more leveraged and for markets without a “Micro” version, you tend to be taking more risk at the minimum trading quantities. Strange then that you need a larger minimum balance to day trade US stocks ($25K), when you can often open a Futures account with just $500. Futures is more risky but micro contracts with extremely low risk are starting to address the issue. In my opinion, Futures win with Stocks a very close second. As for Forex – that’s simply not a level playing field. I steer well clear.

As for the question – “do futures traders do better than currency traders?”, absolutely yes. In fact, many traders came to Jigsaw because of the frustrations they faced trying to trade Forex, so we hear a lot of horror stories from the Forex trading world,