Building and trading synthetic cross-pairs in Hong Kong

Traders in the Hong Kong market face a unique opportunity when it comes to trading cross-pairs. The interbank market allows traders to trade between international markets for up to three years, longer than any other major currency pair. This gives traders an advantage when creating synthetic pairs because they have more time to study the differences in trend and volatility between their current and target positions.

In the past, this method required some skill to time correctly as you needed some market knowledge on how long it would take for the swap to complete. Nowadays, most brokers allow traders to set a termination date on their swaps to focus more on entry and exit points instead of monitoring them constantly.

When trading cross-pairs, one of the first things you learn is that you are always long EUR/USD and short USD/EUR. Often, traders will trade this pair back to back to maintain a spread or buffer between entry points for maximum profitability.

This technique is widespread amongst retail FX traders who do not have access to interbank liquidity. But what happens when you want to set up your trades slightly differently? How can you make money off the fluctuation of spreads instead of just having it work against you? That’s where synthetic cross pairs come into play.

How does synthetic cross pairs work?

Broker 1 executes a sell order at a rate, say 1.09900 in the USD/CNH market. Broker 2 subsequently buys from this order and sells to my friend at a slightly lower rate of 1.09899 in CHF/USD (spot). The process can be thought of as buying spot CHF then selling forward CHF vs USD at whatever spread the brokers decide to charge me for creating these cross-pairs when not executing trades.

Thus, the total number of contracts executed = sell USD/CNH x number of lots x notional amount. The same is valid on the other side when my friend shorted USD/CNH and had the brokers execute a buy order in USD/CNH then a sell order in EUR/USD. In this case, he would have been long EUR/USD and short EUR/USD at some spread.

In theory, there is no reason why cross-pairs cannot be created synthetically with any two instruments that are tradable against each other. For example, if you can trade AUD vs GBP (EURGBP) or NZD vs JPY (EURNZD), then theoretically, one could take the opposite side of these instruments as well. One could even take it a step further and trade three cross-pairs simultaneously by finding an instrument for trading against all three pairs.

In practice, I have found going this route to be much more difficult mainly because broker spreads tend to be comprehensive for these kinds of crosses. The first EUR vs GBP example would probably cost you a 0.8 pip spread on both sides, while a direct pair like EUR/USD would only cost you about 0.4 pips in spreads from most brokers who offer 1:500 leverage.

Common examples of synthetic cross-pairs

Some common examples of synthetic cross-pairs include EURUSD/GBPUSD GBPJPY/EURJPY AUDUSD/NZDUSD AUDCAD/USDCAD. You can create these pairs by taking out a cross-currency and then buying or selling a spot on either side.

In short

If your accountholder base does not offer certain types of FX products, such as synthetic cross-pairs or interbank forwards, we would highly recommend you contact a broker from Saxo Bank and expand your trading toolkit, especially since most forex brokerages offer much better spreads on cross-pairs than spot pairs. Saxo Hong Kong offers an excellent demo account for beginner traders to practise different trading strategies before investing real money. Saxo Bank also offers the lowest commission and excellent customer service.