Forex scam
Encyclopedia
Foreign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...

. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....

.
But "the market has long been plagued by swindlers preying on the gullible," according to the New York Times.
"The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....

.
The North American Securities Administrators Association
North American Securities Administrators Association
The North American Securities Administrators Association , founded in Kansas in 1919, is the oldest international investor protection organization. NASAA is an association of state securities administrators who are charged with the responsibility to protect consumers who purchase securities or...

 says that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud."

"In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists."


In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud. In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on " a number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals."

The foreign exchange market is at best a zero–sum game,
meaning that whatever one trader gains, another loses. However, brokerage commissions and other transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...

s are subtracted from the results of all traders, making foreign exchange a negative-sum game.

Frauds might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,
improperly managed "managed accounts",
false advertising,
Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...

s and outright fraud.
It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.

The U.S. Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....

 (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.

An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....

 has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds.
CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

Not beating the market

The foreign exchange market is a zero sum game in which there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attention full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of gambler's ruin
Gambler's ruin
The term gambler's ruin is used for a number of related statistical ideas:* The original meaning is that a gambler who raises his bet to a fixed fraction of bankroll when he wins, but does not reduce it when he loses, will eventually go broke, even if he has a positive expected value on each bet.*...

. In a "Fair Game" (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt. The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be "resettled" each day, each time costing the full bid/ask spread.

Although it is possible for a few experts to successfully arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...

 the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbitrages themselves are a rival good. (To draw an analogy, the total amount of buried treasure
Buried treasure
A buried treasure is an important part of the popular beliefs surrounding pirates and Old West outlaws. According to popular conception, criminals and others often buried their stolen fortunes in remote places, intending to return for them later, often with the use of treasure maps.-Pirate...

 on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map
Treasure map
A treasure map is a map that marks the location of buried treasure, a lost mine, a valuable secret or a hidden locale. More common in fiction than in reality, "pirate treasure maps" are often depicted in works of fiction as hand drawn and containing arcane clues for the characters to follow...

.)

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day trader
Day trader
A day trader is a trader who buys and sells financial instruments within the same trading day such that all positions will usually be closed before the market close of the trading day. This trading style is called day trading...

s are profitable,' says Drew Niv, chief executive of FXCM
FXCM
Forex Capital Markets, better known as FXCM, is a retail on-line foreign exchange broker based in New York. It provides its services through its own on-line trading platforms and through third party platforms such as MetaTrader 4....

, 'I'd be surprised.' "

Paul Belogour, the Managing Director of a Boston based retail forex trader, was quoted by the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....

 as saying, "Trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But I say to customers: if this is money you have worked hard for – that you cannot afford to lose – never, never invest in foreign exchange."

The use of high leverage

By offering high leverage, the market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...

 encourages traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases his profits, but increases the risk that the trader will receive a margin call
Margin Call
Margin Call is a 2011 American independent drama film, written and directed by J.C. Chandor. The film has an ensemble cast that includes Kevin Spacey, Demi Moore, Paul Bettany, Jeremy Irons, Zachary Quinto, Stanley Tucci, Simon Baker, and Penn Badgley...

. While professional currency dealers (banks, hedge funds) seldom use more than 10:1 leverage, retail clients may be offered leverage between 50:1 and 200:1.

A self-regulating body for the foreign exchange market, the National Futures Association
National Futures Association
The National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...

, warns traders in a forex training presentation of the risk in trading currency. “As stated at the beginning of this program, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital; in other words, funds you can afford to lose without affecting your financial situation.“

Israel

In Israel there are more than 20 active forex companies, a high number for the size of the population as a number of them operate from Israel but focus on attracting foreign customers ( Easy Forex is an example). In one incident, a client sued the firm Easy Forex, alleging that it paid brokers bonuses when clients lost money and fined brokers when clients made a profit. A television report quoted an Easy Forex broker saying, "I had this evil grin on my face one day, when a client lost $35,000 in a quarter of an hour. A guy gets wiped out - I get my commission. A guy comes up a winner and turns a profit - I pay."

See also

  • Boiler room
    Boiler room (business)
    In business, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud...

  • Bucket shop
    Bucket shop (stock market)
    As defined by the U.S. Supreme Court a Bucket shop is "[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain,...

  • Foreign exchange market
    Foreign exchange market
    The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...

  • Fraud
    Fraud
    In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...

  • Gambler's conceit
    Gambler's conceit
    Gambler’s conceit is the fallacy described by behavioral economist David J. Ewing, where a gambler believes they will be able to stop a risky behavior while still engaging in it. This belief frequently operates during games of chance, such as casino games...

  • Gambler's ruin
    Gambler's ruin
    The term gambler's ruin is used for a number of related statistical ideas:* The original meaning is that a gambler who raises his bet to a fixed fraction of bankroll when he wins, but does not reduce it when he loses, will eventually go broke, even if he has a positive expected value on each bet.*...

  • High-yield investment program
The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
x
OK