When your spot trade becomes a two-day contract.
In forex trading any delay is more than an inconvenience: your trading strategy is interrupted, you make fewer trades, costs go up, there's unnecessary risk. It's a waste of your time.
With most market makers today, every trade you make is a forward contract--not a spot trade. What does that mean?
Say you've made a successful intra-day trade and you'd like to close out your position and collect the proceeds. Don't hold your breath... Absent the immediate settlement of a real spot trade, you'll wait two business days until you get your money. (And in the meantime, your funds are a hidden asset for the institution processing your trade.)
What if you'd like to keep your position open? Most market makers require you to do a rollover swap: close out and re-open your position simultaneously, with a new settlement date one day further in the future. (Whom does the swap benefit? Who do you think pays for this antiquated housekeeping detail? And why is it even necessary?)
Two-day settlement restricts your flow of capital, penalizes traders who depend on equity to fund their next trade (which might be in an hour... or in five minutes), and gives unfair advantage to the market maker who provides no value in return. It's just old-fashioned processing.
In a world of increasingly short-term trading (90% of forex trading is intra-day), the system is out of sync with practical reality.
Think it's not a serious problem? Then why have the big banks invested years of time and money making this particular pill a little easier to swallow? (By enabling "netting" through a prime broker or daily settlement through the CLS network.)
As a counter party to every trade, the market maker is responsible for maintaining transaction flow. Two-day settlement invites myriad opportunities for disruption:
through defaults or delays in the transaction stream;
through the need to reconcile inconsistencies; and, consequently
having to make up for time lost in restoring the flow.
In forex trading any delay is more than an inconvenience: your trading strategy is interrupted, you make fewer trades, costs go up, there's unnecessary risk. It's a waste of your time.
With most market makers today, every trade you make is a forward contract--not a spot trade. What does that mean?
Say you've made a successful intra-day trade and you'd like to close out your position and collect the proceeds. Don't hold your breath... Absent the immediate settlement of a real spot trade, you'll wait two business days until you get your money. (And in the meantime, your funds are a hidden asset for the institution processing your trade.)
What if you'd like to keep your position open? Most market makers require you to do a rollover swap: close out and re-open your position simultaneously, with a new settlement date one day further in the future. (Whom does the swap benefit? Who do you think pays for this antiquated housekeeping detail? And why is it even necessary?)
Two-day settlement restricts your flow of capital, penalizes traders who depend on equity to fund their next trade (which might be in an hour... or in five minutes), and gives unfair advantage to the market maker who provides no value in return. It's just old-fashioned processing.
In a world of increasingly short-term trading (90% of forex trading is intra-day), the system is out of sync with practical reality.
Think it's not a serious problem? Then why have the big banks invested years of time and money making this particular pill a little easier to swallow? (By enabling "netting" through a prime broker or daily settlement through the CLS network.)
As a counter party to every trade, the market maker is responsible for maintaining transaction flow. Two-day settlement invites myriad opportunities for disruption:
through defaults or delays in the transaction stream;
through the need to reconcile inconsistencies; and, consequently
having to make up for time lost in restoring the flow.
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