e-Forex and forex futures: Key differences

There are many misconceptions and confusions between currency futures contracts and online forex trading also known as spot forex or e-forex. Both provide a way to speculate on changes in foreign exchange rates, but they aren't exactly the same. Here's a quick look at the main attributes of these

* Currency futures are cleared through an anonymous counter-party via an exchange, spot forex is cleared directly with the trader's counterparty - your broker,

* Maturity dates for currency futures are the third Friday of March, June, September and December. Spot Forex maturity dates are any same business days of the two currencies involved. The four maturity dates a year in currency futures are rolled over to the next maturity dates, approximately every 90, days whereas spot forex maturity days are rolled over on a day-to-day basis known as "spot-next."

* The regulation in spot forex has been self-monitored for years; however, in the United States, the National Futures Association and Commodity Futures Trading Commission are taking much greater interest in spot forex trading. Since December 2000, both the NFA and the CFTC have had jurisdiction and oversight for spot forex activities, creating a safer playing field for traders.

* The pricing on currency futures contracts includes premiums for transaction costs (carrying costs) and interest rate differentials based on when the contracts expire, whereas e-forex is simply the spot price. However, spreads will vary based on the pair quoted, time of trade and amount of trade. Lastly, from a retail traders perspective, in e-forex you receive a bid and ask price; in currency futures, you get a fill price.

* Terminology varies. In spot forcx, typically the larger denominated currency is the traded currency, but currency futures always trade the foreign currency and pricing is quoted in U.S. dollars.

* Currency futures are more standardized (quoted in a set amount of foreign currency, for example) and to some degree less flexible than spot forex, especially when trading the crosses (two currencies outside your local currency).

* The tax treatment of these two markets can be identical or markedly different. The bottom line is e-forex does provide a certain level of flexibility during tax time depending on how you classify them (see "Winning the tax trade in e-forex," page 36).

However, both markets like all markets have their nuances and special circumstances. Both markets are used for financial hedging and speculation; therefore, proper research and due diligence can only benefit those who have a broader knowledge base of the instruments that they trade.