A study published by Greenwich Associates looking at the costs associated with trading FX futures and cash OTC FX products argues that some buy side traders can achieve “significant” savings by using futures over cash.
The firm says it employed a proprietary quantitative model, which calculates the cost of opening, maintaining and closing out a position. To validate key inputs into the model and gather feedback on current demand and pricing, Greenwich says it spoke with 51 FX traders on the buy and sell side.
The model broadly defines costs according to spread; margin and funding; intermediation fees; and platform/CCP fees.
“The results show that FX investors can find significant cost savings (upward of 75% in some cases) by trading futures rather than executing a trade in the OTC markets,” Greenwich says. “For those entities subject to Basel III costs, switching to futures from OTC trades could garner even greater savings.”
The research company also points out that pure costs savings are not the only reason to consider FX futures. As sell-side dealers become more selective in the clients that they prioritise, Greenwich says that some buy-side traders may find liquidity more difficult to access, while others may find that they are getting de-prioritised and receiving fewer services from particular counterparties. “As a result, adding the option to trade in a futures environment could help mitigate the effects of shifting sell-side behaviour,” the firm states.
Greenwich accepts, however, that even with these “potential” cost savings, a switch to futures might not make sense for some FX market participants that trade only infrequently and at relatively small volumes. “And for some investors, there may be lingering scepticism about the available liquidity in an exchange-traded environment, even though recent statistics show that average daily volume (ADV) in FX futures equals or exceeds the volume on a major spot exchange.
“The results of our analysis prove that even before considering the potentially punitive effects that regulations have on trading costs, trading FX futures can have clear economic benefits,” Greenwich says. “For that reason, we expect FX futures to continue to gain traction as an alternative to OTC trading.”