What is known about interrelation between the currency (say EURUSD) spot prices vs. futures on the the same currencies (traded at Chicago CME) ?

I mean what is typical situation - the main price changes happens on futures and then translated to spot by arbitragers or vice versa ?

Especially during the news

  • $\begingroup$ The Futures market in currencies is very small in size compared to the spot, so that may be a clue. All the big players are in spot. $\endgroup$
    – Alex C
    Aug 5 '15 at 22:37
  • $\begingroup$ @AlexC Well, manya people say like this, but I have not seen arguments, average daily volume on main spot platforms (Reuters, EBS, Hotspot) seems to be about 250billions see Hotspot site info, CME about 100 billions on FX-futures (not sure) - not big difference $\endgroup$ Aug 8 '15 at 14:19

EBS and Reuters are major FX spot price discovery sources, but CME futures can be used as a spot price discovery source as well, as well as smaller venues and exchanges. They are all liquidity pools. The typical situation depends on the traders and the machines they use (and perhaps geographic location) but there is basically no difference between spot and futures prices once the futures interest rate differential is stripped out. In other words, the futures price reacts to news in the FX market just like the spot price. Indeed, the futures can be used to hedge FX spot risk, and used when there's a liquidity shortage in spot. I don't think there is any arbitrage opportunity between spot and futures. All the major players are hooked up to both the core spot liquidity venues and the futures, CME in particular, so there is no "leader".

  • $\begingroup$ Thank you ! However I think "there is no arbitrage oppurtunity" - because there already are very very fast and smart arbitragers. Imagine one makes a deal buying 100 M eurusd on say Reuters -- the price would change at Reuters - is it necessary that he makes the same deal at CME - no - but what makes the price to change at CME ? Arbitragers do it. $\endgroup$ Aug 13 '15 at 11:38
  • $\begingroup$ No I don't believe that's correct. If a price moves on Reuters, then everyone watching Reuters as a price discovery source will adjust their prices everywhere else, including CME. There wouldn't be any actual arbitrage. You don't need to make a deal to move the price, just move the price. Otherwise if you don't move your price to keep up with everyone else, then you will get arbitraged, and you could find yourself with a position out of the market, with a risk you then have to cover at a loss. So it's like prices move out of fear of arbitrage, not the actual event. $\endgroup$
    – rupweb
    Aug 13 '15 at 11:55
  • $\begingroup$ Well, if we assume that main quotes are provided by very fast and smart marketmakers, that sounds reasonable, however if we assume that some quotes provided by real investors who dont care about 1-2-3 pips - that it is not true - assume some huge client put an order he just want to buy/sell by his price (e.g. hedge something) - he does not care much about anything else - just want to act by his price - he will not change his order if something somewhere changed. Another example - stop losses, take profits, margin calls - these orders typically are "stable" they do not change in "moment", Ok ? $\endgroup$ Aug 14 '15 at 9:27
  • $\begingroup$ yes, on the buy side, that sounds right... and if you like, that large order on the buy side is in fact "arbitraged" by the sell side sales trader who is doing to work it through the market in small chunks so nobody knows there even is a large order. But, I am not taking the buy side perspective of arbitrage, or leading the market, I am taking the sell side perspective where market prices will move everywhere together out of fear of being left behind, which would mean off market prices sent to others, who would then arbitrage them immediately against the current market. $\endgroup$
    – rupweb
    Aug 14 '15 at 9:42
  • $\begingroup$ @Alexander Chervov and think about anyone with a large order, on either side nobody is going to tell the market their position. If someone comes along and says "hey I wanna sell 100" then they get different price compared to working 70 clips of 1 or 2 until the whole order is satisfied. $\endgroup$
    – rupweb
    Aug 14 '15 at 9:59

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