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I think this is a good educational discussion here, can I just ask what's the point of depth and order flow of 6E when it follows spot (which may have orders in different places)? If there is a larger buy order at some level on 6E and I hide my stops behind it then suddenly at some bank sell orders are executed pushing price way down what's the point of someone looking at the depth of 6E when it does not have banks orders (nobody has)?
maybe the euro will break out to the upside of this triangle but on the other hand perhaps a small double top may have formed (the highs from 4th and 10th with reducing volumes) so we may test the lower side of the triangle. Jobless report this afternoon so we shall see..
I thought this was more of a EUR-USD thread but this is turning into the basics of Futures contracts.
The "point" of trading from a DOM on the 6E is that it is a centralised market, where you can see Limit orders vs Market orders, exchanged volumes, and open interest.
FX is an OTC market and does not have the above and you don't get an official DOM.
Although the 6E follows the spot as it is initially a contract on the spot, this should be seen as separate instruments. So choose to work the spot or the Future contract, and big orders on the spot will be "priced" in the 6E so no need to worry that you will not see what happens on the spot if you look at the depth of the 6E (you will never see what happens on the spot anyway). Not sure what the last part means in relation to bank orders sorry.
as someone already mentioned-what makes any liquidly traded futures contract follow its underlying cash market is simply the buying & selling of the arb traders. The futures is the exact equivalent of the cash with the additional premium of the time value of money until the expiry (plus the value of dividends in an equity index, or the cost of warehousing & transport for a commodity). If you can capture the mispricing between fair value of the futures & the current spot rate - thats pure arbitrage = free money. You buy one sell the other & either hold the position to expiry, or trade out of it when the basis flips the other way. There are a ton of prop desks around the world with automated systems tracking & trading this 24 hours a day. Back in the day the mispricing was huge. Nowadays it gets whacked back into line before you'd ever notice it, except in situations of extreme volatility.
So as was mentioned, pure arbitrage is the reason the futures "follows" the spot.
Thanks @dom64 and @bebop for the explanation! This "whacked back into line" is especially pronounced on the thinly traded E7...I traded it a bit and it was not fun..the deeper M6E is much better.
Thanks dom64 and debop for patience and explanations. What I meant by "banks orders" is that very large spot traders who don't trade futures can have their orders waiting which are invincible to anybody including 6E traders. The arbitrage will make the price follow but there will be no 6e market depth reason for the move (if they caused a blip) if they didn't hedge or placed the same order in futures - unlikely situation though