A forex scam (also referred to as foreign exchange scam) is a name given to any trading scheme that is used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. According to Michael Dunn of the U.S. Commodity Futures Trading Commission currency trading has become the fraud du jour as of early 2008. But according to the New York Times "the market has long been plagued by swindlers preying on the gullible". According to The Wall Street Journal "The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records". It has been said by The North American Securities Administrators Association that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud."
In August, 2008 a special task force has been set up by the CFTC in order to deal with growing foreign exchange fraud.
The forex market is a zero-sum game, what it means is that whatever one trader gains, it is lost by another, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, all these things technically make forex a "negative-sum" game.
These scams might include churning of customer accounts in order to generate commissions, selling software that is presumed to be guiding the customer to large profits, improper management of so called "managed accounts", false advertising, Ponzi schemes and outright fraud. These scams are also referred to any retail forex broker by whom it is indicated that trading foreign exchange is a low risk, high profit investment.
It has been noted by The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, that there has been an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.
Between 2001 and 2006 more than 80 cases has been prosecuted by the U.S. Commodity Futures Trading Commission involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people have lost $460 million in such forex frauds. It has been said by Godfried De Vidts, who is the president of the Financial Markets Association, which is a European body, that it is the duty of banks to protect their customers and they should ensure that 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 several experienced well-capitalized professional traders (e.g. working for banks) who are able to devote their attention full time to trading. An inexperienced retail trader will have a significant information disadvantage if compared with to these traders.
Although it is possible for a few experts that they can successfully arbitrage the market for an unusually large return, but that does not mean that a larger number could earn the same returns even if it is given the same tools, techniques and data sources. It is due to the reason that the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbritrages themselves are a rival good.
By definition retail traders are almost undercapitalized. Thus they are being subjected to the problem of gambler’s ruin. In a fair game (one with no information advantages) between two players that continues until one of the two trader goes bankrupt, the player having the lower amount of capital has got the higher probability of going bankrupt first. Since the fair game is between a retail speculator and the market as a whole and market has nearly infinite capital, so this means that he will almost certainly go bankrupt.
The bid/ask spread is always paid by the retail trader, which makes his odds of winning less than those of a fair game. Margin interest may be included in the additional costs, or if a spot position is kept open for more than one day the trade may be "resettled" each day, while each time it cost the full bid/ask spread.
It has been said by Paul Belogour, the Managing Director of a Boston based retail forex trader, that, Although trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But he says to customers that if this is money that they have worked hard for than that they cannot afford to lose so never, ever invest in foreign exchange.
The Use of High Leverage
By offering high leverage, the traders are encouraged by the market maker to trade extremely large positions. This increases the trading volume that has been cleared by the market maker and increases his profits, but it increases the risk that the trader will receive a margin call. While leverage of not more than 10:1 is used by professional currency dealers (banks, hedge funds), generally leverage between 50:1 and 200:1 is offered to a retail clients.
Traders have been warned by a self-regulating body for the foreign exchange market, the National Futures Association, in a forex training presentation of the risk in trading currency. As stated at the beginning of this program, a high level of risk is carried by off-exchange foreign currency trading and it may not be suitable for all customers. Funds that represent risk capital are the only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment. In other words, those funds that you can afford to lose without affecting your financial situation.
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Posted by R. MAK. in Currency Rates, Currency Trade, Forex Basics, Forex Facts, Forex Market, Forex trading, Trading · 0 Comment
