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A friend of mine, having recently sold his business, plans to trade spot
currencies. Knowing that I traded index futures, he attempted to explain why
he had chosen currencies to trade, rather than futures, options or stocks.
His rationale was that the leverage was considerably more than index futures
and that liquidity surpassed even that of bonds. He mentioned that the
spread was 3 pips.
Knowing nothing about spot currencies, I was at a bit of a loss to explain
to him why the hair on the back of my neck was rising. On the question of
liquidity, whilst the overall market for currencies would be huge, by the
time you narrow it down to a specific currency and then consider that the
large players wouldn't be interested in his pocket change, it doesn't seem
that liquid. As for leverage, I imagine that when you compare the average
daily range with the margin required, it won't look that attractive. A final
concern would be the 3 pip spread. I have no idea whether that is the norm
nor indeed where the bid/asks come from.
Any enlightenment here, public or private would be welcomed.
Thanks.
Andrew
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