Traditionally, trading forex and futures contracts in Asia is a little different than most other parts of the world. In many regions, such as Europe and North America, traders can buy and sell on both exchanges simultaneously with relatively low commissions. This gives retail investors the ability to access foreign exchange (forex) or commodities futures through one brokerage account.
However, exchanges in Asia require an investor to trade on either the local market or another region’s market by themselves, unless they happen to be based close enough to bridge that divide themselves. This means investing in forex requires more research and homework than buying and selling futures contracts in Asia.
The primary differences between trading forex and futures in Asia
When it comes down to it, for traders in Asia, the difference between trading forex and futures contracts is quite simple: they can only buy or sell one of them at a time. While this seems like a limitation, these rules exist for a good reason – it reduces risk and market volatility by ensuring that both markets don’t become so interconnected that prices begin fluctuating wildly based on speculation from either side of the globe.
In addition, if market prices from one region influence those in another, it not only limits the ability of each market to operate with its fundamentals but also encourages speculation.
Trading in Asian equity markets
Most Asian equity markets are considered emerging markets because of their relatively small size, lack of liquidity and less developed regulations. This means the investor must do more homework before investing in these markets because Asian equity markets are illiquid, which is when there aren’t enough buyers or sellers to create an orderly market.
The risk of trading low volume stocks is that it may cause significant fluctuations in prices due to lack of depth in the order book.
Furthermore, as most Asian countries have different regulatory systems from those in North America or Europe, forex traders often have different instruments available for trade – such as contracts for difference (CFDs) instead of futures contracts.
In addition, some places may only allow speculative trading on margin rather than traditional buy and hold positions. There are also benefits to trading forex instead of futures, such as different tax laws and lower account minimums. This makes forex more accessible to smaller investors, who may not want to put up the money required for a full-fledged futures contract.
The risks of trading forex and futures in Asia
The risks of trading forex and futures in Asia explains why Asia does not have a larger share of these markets. While it may be harder to find information on Asia’s market conditions, cost, liquidity and other factors play a significant role in limiting trade. In addition, non-tariff barriers such as differing rules between countries that hinder derivatives trading could further suppress activity in Asia.
Another problem is that most major Western firms are unwilling to open offices or subsidiaries in Asia due to the cost involved. If these firms try to expand into Asia, their subsidiaries must adhere to increasingly strict corporate governance structures.
Yet another issue is that traders, speculators and investors looking for derivatives trading opportunities would need to do business with at least two providers of forex or futures indices; one for Asian contracts, the other for non-Asian ones.
The presence of multiple providers encourages competition and ensures each provider remains independent. However, this does not mean they offer the best prices possible or optimal risk/return ratios, which could stifle growth for Asia’s foreign exchange and futures markets.
Finally
There are some jurisdictions in Asia where derivatives trading is not allowed. For example, the Chinese government has banned foreign exchange futures in China, which means there can be no Asian index for forex or futures contracts anywhere else in the region. Beginner traders should always use a reputable online broker from Saxo Bank and learn more about trading at Saxo capital markets pte.
