Prior to the late 1990’s the Foreign-Exchange Market was the playground of only large banking institutions, hedge funds, and wealthy individuals. This was primarily because minimum contract sizes were very large—between $100,000 and $1,000,000—and most investors simply could not afford to take positions. However, the advance of technology and the internet has changed everything. Today, a person can open an account with as little as $100 and begin trading in the FX Market. Not to say that forex trading is suitable for anyone, but innumerable brokers have opened shop in the last 10 years, as the retail FX Market has exploded in growth.
The FX Market is quite different from other financial markets such as the New York Stock Exchange. First of all, the FX Market is way bigger. Average daily turnover is estimated to be around $3 trillion, while the average daily turnover in the NYSE is under $100 billion. Also, the FX Market is a decentralized market, meaning there is no central place where orders are executed such as there is in the NYSE. Instead, the FX Market is a loosely connected network of international banks. Thus, there is no governing regulatory body that oversees activity in the FX Market, and this lack of regulation has caused a vacuum to form and many scam artists have filtered into the industry in an attempt to take advantage of unknowing investors. In this article, we will expose a few of the most common forex scams, and then we will discuss specific steps investors can take to protect themselves and avoid fraudulent scams.
Unregistered Brokers
This is a major problem in the FX Market. Not all countries have legislation that requires brokers to register with a regulatory body. A broker may open up shop offshore in Panama or another country and begin to solicit clients through online marketing efforts. At first, the operation usually seems legit. Clients begin depositing funds and trading in the FX Market and everything seems to be moving forward nicely. Then, once enough clients have deposited funds so that the total amount is a large figure, the broker will close up shop, withdraw all client deposits, and disappear. When this happens, there is virtually nothing a depositor can do. The NFA and CFTC will most likely get involved, but usually investors will not get any of their funds back, and if they do, it is usually pennies on the dollar. The best forex broker will be regulated in an onshore location by a reputable regulatory body. U.S. investors should look for a broker regulated by the NFA and the CFTC.
Unregistered Traders
Many traders will attempt to take advantage of investors by raising capital and saying they are “trading” in the forex market. These scams are widespread and they operate in many different forms. One common form they take is—a trader will solicit funds and guarantee a certain percent return each month. Then, he will take funds from investors, and instead of trading, he will simply use the funds to finance a very lavish lifestyle of luxury homes, cars, boats, and vacations.
As far as investors know, the trader is making good money in the market. The trader is paying investors each month and all seems well. Investors tell their friends about this amazing investment opportunity and the scam spreads without the trader even trying to solicit new clients. They begin to come to him. This type of scam can go on for a long time, but eventually everything falls apart when investors call for their capital investment and the trader doesn’t have it.
Fraud Prevention
The single best step an investor can take is to never conduct business with any trader or broker that is not fully registered, compliant, and in good standing with the National Futures Association. While this won’t guarantee against the loss of funds, it will at least dramatically increase the probability that one is dealing with a legitimate firm.