Rolling SPOT FX - a product for the retail customer

Foreign exchange trading traditionally refers to over-the-counter (OTC) SPOT (the single payment option trading) currency contracts in the interbank market. SPOT automatically converts the option to cash when the option is successful, giving a pay-out (Strazisar 2012); the SPOT option contract is not cancellable by selling. The standard settlement time frame is usually two business days (T+2), with some exceptions settling on different dates such as USD/CAD (T+1).

Although this OTC product is popular in the interbank market, it became increasingly popular following its simplification in the retail domain. FX trading in the retail domain is performed through trading a rolling spot FX product (Strazisar 2012, p. 10), a product that is more appealing to the retail community rather than the SPOT currency contracts in the interbank market. The contract has the same underlying asset of the two-day forward, but with no physical cash settlement date. The settlement cash amount at the end of each day acts as a rollover (simultaneous operation of buying one value date in exchange for selling another value date) resetting the delivery to the next trading day. The difference in prices between the two value dates results in creating a fee (usually a small amount) and this amount is defined as a rollover fee (or a swap fee).

Essentially, retail FX traders engage in trading by speculating on currency fluctuations without the need to worry about any physical delivery of their position. Trading in reality, a CFD (contract for difference) cash settled forward contract, has the market maker to act, as well as the counterparty paying the difference between the current value of the asset and its value at contract time (Marckhoff, Wimschulte 2009, p. 258).

References

MARCKHOFF, J. and WIMSCHULTE, J., 2009. Locational price spreads and the pricing of contracts for difference: evidence from the Nordic market. Energy Economics, 31(2), pp. 257-268.

STRAZISAR, B., 2012. Rolling spot forex trading – financial problem or ponzi? Working Paper.