Home Forex Trader's Bill of Rights Chapter 10

How on earth is the obligation to pay for anything a “right”?

Standard practice today is that the interest rate attached to any currency only matters if you keep your position open from one day to the next. Your market maker will require you to do a rollover swap, and part of the cost of that (unnecessary) transaction is the difference in interest rates between the currency you're buying and the one you're selling. No matter how your position may have changed during the day.

Day traders say, So what?

Day traders, here's what:

Removing interest rates from the trading decision is just plain foolish. If you pretend that currencies as diverse as the Euro, the U.S. Dollar, the Argentine Peso and the Polish Zloty are all the same, you're ignoring a basic risk that can kill even a short-term trade.

By removing interest from the buying and selling equation, the market creates an artificial bias toward shorting weaker currencies (with higher rates of interest), and, potentially, rewarding buyers of stronger currencies (with lower rates of interest). The result? Distorted pricing flows that upset trends, create valuation havoc, and encourage speculation for its own sake.

Or, what if you just don't get around to closing your position before the end of the day—or you'd like to keep it open without the rigmarole and unnecessary cost of the rollover swap?

Interest rates should have a positive effect on trading flows. But that's not
how it works in the forex market. During the day they skew prices by
encouraging speculation on weaker currencies. At the end of the day they
lead investors to make -- or not to make -- trades for the wrong reasons.
However you look at it, discrete interest makes for bad trading decisions.
Talk about unnecessary risk.

If day traders are getting a free ride now, why would anybody want to change that?

An appeal to your higher nature:

1. The payment of continuous interest, second by second, recognizes that currencies are different. That assigning appropriate risk is a rational part of forex trading. That unnecessary volatility (benefiting only speculators and market makers) should not be subsidized.
2. Continuous interest payment enables central banks to intervene during the trading day to manage their currencies a bit at a time, instead of making draconian adjustments in interest rates overnight.
3. Volatility won't disappear, but continuous interest will make pricing flows less erratic and help the market avoid free-falls.

An appeal to your self-interest:

1. Let's face it: if you take a position today for five minutes or two hours, you're looking for the highest possible return at a calculated risk. But the only “calculation” is the number of minutes your position is open.
2. With continuous interest-rate payment, the calculation becomes more interesting: suddenly, there are two components of return—what you make on the trade, and the interest you stand to earn. One is impossible to predict; the other is a certainty. Of course, you may end up owing interest. But the potential to increase your return is there, and this is the right you are currently denied.

No less than dealer intervention or outright abuse, interest-free day trading undermines market equilibrium. The onus here is not on the trader, but on market makers and central bankers to make a more efficient connection between currency and how markets determine its value.