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Learn why this currency trader believes that one market offers benefits over the other for retail traders.

Currency traders probably know that you have a choice between the spot market and the futures market.  There's always an argument between traders who love each.  Our guest today is Boris Schlossberg to talk about that.  So, Boris, I know that you come from the spot market; what's your choice in terms of spot vs. futures?

Well, you know, I think futures is a very good product, but I think it's just simply not very accessible to the retail trader, and the main reason is this:  Futures are basically traded in larger sizes, in the 100,000 unit standard lots.  There is a product that trades in smaller sizes at around 10,000 unit lots, but it's just not liquid enough and, therefore, not really as competitive as a spot product.  Spot product is just much more flexible. 

Spot brokers, for example, owe for sizes as little as 1,000 units through as large as 100,000 units, and I think it's that flexibility that makes spot the more preferable choice for most retail traders.  Now that having been said, I actually think, you know, the futures market is an intelligent market for the future because it's a centralized market, you have only one counterparty, you don't have counterparty risk, there's lots of things to be said in favor of a global futures currency market.  I just don't think it's there yet as a vital product.

What about the argument for traders that may have been more valid a few years ago instead of now, but that the broker in the spot market is taking the other side of your trade and, therefore, inherently, their risks are not aligned with yours?

I think this is truth to some extent because certainly, of course, it's a dealer market, and this is true, by the way, not just on the retail side but on the institutional side because the FX market is all the way through an OTC market, which means it's a deal-driven market.  However, these days there are so many platforms that are pass-through, meaning a straight through processing, where the dealer no longer acts as a principal but acts primarily as an agent.  He simply facilitates your order and sends it over to the interbank market where it's put in a blind pool. 

Overall, I think the spot market has become so competitive and you can see them in the spreads of all the currency pairs, and it has become much more regulated and, therefore, the possibility for kind of really wild swings, and sort of the ability for dealers to kind of abuse their customers exists to a far smaller degree now than it used to be, but that having been said, I do think you're right, that there is still a little bit of inherent conflict in the market and _____ should be aware of it whenever they're trading, especially on a very, very short-term time frame, which is where this could be most evident.

Well, when I started trading currencies in 97, the spreads would widen and even stop trading altogether when there was a lot of volatility.

Correct.

Do you still see a lot of that happening, or not as much?

No, you see far less of that happening.  First of all, you see much smaller widening of the spreads, and secondly if that widening is occurring, it's occurring for much smaller periods of time.  Now, this all goes to the idea of the market as becoming much more competitive, and also much more STP-driven, that is there are quite a lot of brokers now who simply pass all the flow to the interbank, where there is much greater activity. 

Also, the other thing about the FX from the institutional side is that it's also become much more liquid.  You now have hedge funds, HFT, lots of other participants aside from just mere interbanks who are willing to make markets in FX and, therefore, create a lot more liquidity pools and better pricing for everybody.  Generally, I think the trend is really more positive for the retail trader.  You will now be able to trade much better prices with much steadier feeds than you have in the last three or four years, so the experience generally in my opinion is much better, but overall I still think problems persist, and we certainly could see more improvement as we go forward.

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