Trading foreign exchange and futures can be a lucrative venture, but it’s essential to understand the differences between the two markets before you start trading. This article will look at the critical distinctions between FX and futures trading in the UK. We’ll discuss some of the benefits of each market, so you can decide which is right for you. Stay tuned for more insights on FX and futures trading. Click to read more on futures.
The foreign exchange (FX) market is the world’s largest and most liquid market, with a daily turnover of more than $5 trillion. Futures trading is a smaller but growing market, with a daily turnover of $30 billion. Both markets have their roots in the City of London, which began as regulated financial instruments in the late 19th century.
Four major banks dominate the UK’s FX market: HSBC, Barclays, Deutsche Bank, and UBS. These banks account for more than 40% of all trading activity. The London Stock Exchange is also a significant player in the futures market, with nearly 20% of all trading volume.
In foreign exchange trading, participants buy, sell, and exchange currencies. The market is open 24 hours, five days a week. Futures contracts are agreements to buy or sell a financial instrument at a specified price on a future date. These contracts are traded on exchanges and are typically used to hedge against price movements in the underlying asset.
The critical difference between FX and futures trading is that foreign exchange is a spot market, while futures contracts are traded on margin. You can trade currency pairs without putting down the position’s total value. In contrast, when you trade futures contracts, you must have enough money in your account to cover the initial margin requirement.
Another key difference is that foreign exchange trading is largely unregulated, while futures contracts are regulated by the UK’s Financial Conduct Authority (FCA). It means that there is more risk involved in FX trading than in futures trading.
It is the most liquid in the world, meaning there is always a buyer or seller for every currency pair. This liquidity makes it easy to enter and exit trades and provides arbitrage opportunities.
Another benefit of FX trading is that it’s a 24-hour market, which means you can trade at any time of day or night. The market’s high liquidity and 24-hour nature also make it ideal for scalping and day trading.
They are traded on margin, meaning you can control a prominent position with a small amount of capital. This leverage can lead to higher profits, but it also magnifies losses.
Another benefit of futures trading is that the FCA regulates it, which means that strict rules are in place to protect investors. Futures contracts are also standardized, which makes them easy to trade.
Regarding regulations, foreign exchange and futures trading are subject to the Market in Financial Instruments Directive (MiFID II). This EU directive sets out rules around financial markets, including transparency, best execution, and investor protection. MiFID II came into effect in January 2018 and applied to all firms providing client services in the EU.
Under MiFID II, all firms providing FX trading services must be authorized by the FCA. However, there is no specific registration regime for FX traders in the UK.
Similarly, all firms offering futures contracts must be authorized by the FCA. Futures traders in the UK must also be members of the London Stock Exchange and trade through a registered broker.
In summary, both foreign exchange and futures trading are subject to MiFID II and the rules of the FCA. However, foreign exchange trading is not explicitly regulated in the UK, while the London Stock Exchange regulates futures trading.
Both foreign exchange and futures trading have their unique benefits. If you’re looking for 24-hour liquidity and the opportunity to scalp or day trade, then the foreign exchange market may be suitable for you. On the other hand, futures trading may be the better option if you’re looking for leverage and regulated contracts.
It’s important to remember that both markets come with risks. Foreign exchange is a largely unregulated market, meaning more risk is involved. Futures contracts are also traded on margin, meaning losses can be magnified. So, make sure you understand the risks before you start trading.