Saturday, April 29, 2006

Currencies, Anyone?

ONLINE TRADING ISN’T JUST FOR FOLKS WHO TRADE STOCKS and options. Some Web-based brokers appeal specifically to those with an interest in trading currencies, commodities and other instruments.

OANDA (http://fxtrade.oanda.com), which was launched as a Website that provided exchange-rate quotes in the late 1990s, morphed into a foreign-exchange platform called FXTrade in 2001. Based in New York City, it has about 15,000 customers, but more than 100,000 have “demo” accounts that allow them to trade currencies with model portfolios, not real money. The platform makes extensive use of price/time graphs.

Late last year, OANDA introduced an options contract called FXBoxOption, which allows a customer viewing a price chart of a particular currency pair, such as the U.S. dollar and euro, to indicate via a box on the chart where the price, or exchange rate, is likely to be at a subsequent time, be it five minutes or six months later. The system then calculates the payout that would accrue if the price of the currency pair in question reaches the level stipulated. Lower-probability price targets have higher payouts, and vice versa.

Once the payout is calculated, the customer can decide whether to purchase the option and, if so, how much to invest. If the price hits its target by the prescribed time, the customer receives the payout. If it misses, there is no payout.

This option is intriguing, though risky, because it is priced in real time after the customer defines it. As noted, it can be held for minutes or months. BoxOptions aren’t traded on any exchange; they are a contract made between the customer and OANDA. You can learn more about BoxOptions at http://fxtrade.oanda.com/boxoption/.

Like most forex-trading firms, OANDA doesn’t charge commissions. Instead, it collects the spread between bid and ask. Spreads are relatively tight; the U.S. dollar (USD)/euro spread is 11/2 pips, though some pairs have much higher spreads. (A pip is 1/100th of a cent.) The pound/yen spread, for instance is 6-to-6 1/2 pips. The spread is the same whether you’re trading a lot of $1,000 or $1,000,000, which is somewhat unusual. Many other forex firms tighten the spread as the size of the transaction increases.

Another key component of forex trading is utilizing leverage. Stock and option traders know this practice as trading on margin, but their use of margin is significantly less than that employed in foreign-exchange trades. OANDA lets customers enter a trade with 50-to-1 leverage, and lever up to 100-to-1 to maintain the position. If the price moves against them, they either have to liquidate the position or put up more money to maintain it.

OANDA has no minimum for opening an account, and you can trade lots as small as $1. Interest accrues by the second, rather than on a daily basis, which is customary.

SOME BROKERS LET YOU TRADE COMMODITIES ONLINE, though most restrict you to electronically-traded contracts such as S&P 500 futures. Xpresstrade (http://www.xpresstrade.com) offers 24-hour trading of electronic and open-outcry futures products, including crude oil and gold, around the world. Customers also can trade 20 currency pairs on the same platform. The firm provides access to more than 25 exchanges and more than 300 products. Based in Chicago, it has customers in more than 100 countries.

The Xpresstrade platform, developed in-house, runs from a browser using Java. Dan O’Neill, Xpresstrade’s principal, says the site aims to offer a full suite of trading tools and resources, including conditional and trigger-type orders. Many electronic-futures platforms operated by the exchanges don’t accept GTC (good until cancelled) orders, so the platform simulates one by maintaining it on the broker’s computer and on the exchanges for you. You can also place time-directed orders, which might, for example, work for 20 minutes and then be canceled, or activated, two hours after the order is placed.

All the quotes on the Website are real-time, offered at no additional charge. O’Neill says, “It’s a huge expense for us, especially the overseas exchanges, but our customers can’t afford to trade off delayed quotes.” The platform allows customers to trade futures/options combinations, such as butterflies, condors and spreads.

If you’re wondering how the commodities and futures markets work, Xpresstrade offers 11 self-study courses on its site that can be accessed at any time. Topics include Oil Market Basics and How to Trade Futures.

Commissions depend on what you’re trading. Futures commissions range from $5 to $11 per contract. Options on futures are $10 per contract. Currency trades don’t carry a commission. Like OANDA, Xpresstrade makes its money on the bid/ask spread, which ranges from 3 pips (USD/euro) to 15 pips (euro/Australian dollar).

Published in Barron’s, April 24, 2006

Posted by twcarey on 04/29 at 09:00 AM
Published in Barron'sPermalink