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Forex Scam

This document discusses forex scams, which are schemes used to defraud traders in the foreign exchange market. Victims are often promised high profits but their money is instead stolen by scammers. These scams have increased as forex trading has grown more popular. Regulators are working to crack down on fraudulent activities but scammers continue to find new ways to prey on inexperienced retail traders.

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2K views4 pages

Forex Scam

This document discusses forex scams, which are schemes used to defraud traders in the foreign exchange market. Victims are often promised high profits but their money is instead stolen by scammers. These scams have increased as forex trading has grown more popular. Regulators are working to crack down on fraudulent activities but scammers continue to find new ways to prey on inexperienced retail traders.

Uploaded by

felixaliu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Forex scam 1

Forex scam
A forex (or foreign exchange) scam 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. Currency trading "has become the fraud du
jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.[1] But "the
market has long been plagued by swindlers preying on the gullible," according to the New York Times.[2] "The
average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to
The Wall Street Journal.[3] The North American Securities Administrators Association says that "off-exchange forex
trading by retail investors is at best extremely risky, and at worst, outright fraud."[4]
"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."[5]
In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud.[6] 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."[7]
The forex market is a zero-sum game,[8] meaning that whatever one trader gains, another loses, except that brokerage
commissions and other transaction costs are subtracted from the results of all traders, technically making forex a
"negative-sum" game.
These scams might include churning of customer accounts for the purpose of generating commissions, selling
software that is supposed to guide the customer to large profits,[9] improperly managed "managed accounts",[10] false
advertising,[11] Ponzi schemes and outright fraud.[4] [12] It also refers to any retail forex broker who indicates that
trading foreign exchange is a low risk, high profit investment.[13]
The U.S. Commodity Futures Trading Commission (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.[14]
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."[15]
Between 2001 and 2006 the U.S. Commodity Futures Trading Commission 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.[1] 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?"
Forex scam 2

Not beating the market


The foreign exchange market is a zero sum game[8] 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. 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 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 on an island is the same, regardless of how many treasure hunters have bought copies of
the treasure map.)
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 traders are profitable,' says
Drew Niv, chief executive of FXCM, 'I'd be surprised.' "[16]

The use of high leverage


By offering high leverage, the market maker 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. 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[2] .
A self-regulating body for the foreign exchange market, the National Futures Association, 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.“ [17]

Convicted scammers
• Russell Cline
• Russell Erxleben
• Richard Matthews, Jr.
• Joel N. Ward

Under criminal investigations


• WinCapita[18] [19]
Forex scam 3

See also
• Boiler room
• Bucket shop
• Foreign exchange market
• Fraud
• Gambler's conceit
• Gambler's ruin
• High-yield investment program
• Retail forex

References
[1] Karmin, Craig (2008-01-12). "How a Money Trader went Bad; Bets on Currency Prices Become 'Fraud du Jour' Amid Regulatory Holes"
(http:/ / online. wsj. com/ article_print/ SB120010072930285383. html). The Wall Street Journal (Dow Jones and Company): p. B1. .
Retrieved 2008-01-12.
[2] Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100" (http:/ / www. nytimes. com/ 2005/ 06/ 19/ business/
yourmoney/ 19fore. html?_r=2& adxnnl=1& oref=slogin& adxnnlx=1191337503-g1yHfewhqPWye0XtI+ Eq0A& oref=slogin). The New
York Times. . Retrieved 2007-10-30.
[3] McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits"
(http:/ / online. wsj. com/ article/ SB112233850336095645. html?mod=Markets-Main). The Wall Street Journal (Dow Jones and Company). .
Retrieved 2007-10-31.
[4] " Forex Fraud Investor Alert (http:/ / www. nasaa. org/ Investor_Education/ Investor_Alerts___Tips/ 6627. cfm)". North American Securities
Administrators Association, accessed January 12, 2008
[5] "Regulators Join Forces to Warn Public of Foreign Currency Trading Frauds" (http:/ / www. cftc. gov/ newsroom/ generalpressreleases/ 2007/
pr5332-07. html). U.S. Commodity Futures Trading Commission. 2007-05-07. . Retrieved 2008-03-18.
[6] "CFTC establishes task force on currency fraud". Washington Post. 2007-08-11.
[7] The Federal Register (http:/ / www. thefederalregister. com/ d. p/ 2010-01-20-2010-456) Section E. The Commission's Proposed Rules
[8] Douch, Nick (1989). The Economics of Foreign Exchange. Greenwood Press. pp. 87–90. ISBN 13 9780899304991.
[9] SOFTWARE VENDOR CHARGED (http:/ / www. cftc. gov/ opa/ enf03/ opa4789-03. htm) CFTC News Release 4789-03, May 21, 2003
[10] CFTC complaint (http:/ / cftc. gov/ opa/ enf05/ opa5142-05. htm) Forex Advisory Firm and Trade Risk Management Firm Charged With
Fraud
[11] Fraud charges against multiple forex Firms (http:/ / cftc. gov/ opa/ enf04/ opa4946-04. htm) Commodity Futures Trading Commission
(CFTC) Release: 4946-0
[12] Foreign Currency Fraud Action (http:/ / cftc. gov/ opa/ enf04/ opa4956-04. htm) Commodity Futures Trading Commission (CFTC) vs.
Donald O’Neill
[13] FOREX Advisory (http:/ / www. cftc. gov/ opa/ enf98/ opaforexa15. htm) Commodity Futures Trading Commission's FOREIGN
CURRENCY TRADING FRAUDS
[14] Forex Information (http:/ / www. cftc. gov/ opa/ enf03/ opa4789-03. htm) Commodity Futures Trading Commission (CFTC) Forex
Information for investors
[15] National Futures Association (NFA) (http:/ / www. nfa. futures. org/ news/ newsRel. asp?ArticleID=1540) NFA launches learning program
[16] Karmin, Craig; MICHAEL R. SESIT (2005-07-26). "Currency Markets Draw Speculation, Fraud" (http:/ / online. wsj. com/ public/ article/
SB112233048975295402-NbzPFRn1JqQly3JoxqjuFM_9kn8_20060805. html). The Wall Street Journal (Dow Jones and Company). .
Retrieved 2007-10-31.
[17] NFA Forex Training (http:/ / www. nfa. futures. org/ forex_training/ content/ module5-1. htm)
[18] Finnish Police News Release (http:/ / www. poliisi. fi/ poliisi/ krp/ home. nsf/ pages/ 87736A1CB0948C3DC225742900541B5F)
[19] Helsinki Times (http:/ / www. helsinkitimes. fi/ htimes/ index. php?option=com_content& view=article&
id=2597:over-700-criminal-complaints-on-wincapita-finnish-police& catid=33:general& Itemid=201) Over 700 criminal complaints on
WinCapita -Finnish police, August 13, 2008
Article Sources and Contributors 4

Article Sources and Contributors


Forex scam  Source: http://en.wikipedia.org/w/index.php?oldid=382728171  Contributors: A. B., Abj1, Albertod4, Allstarecho, Altenmann, Amniarix, Aosman, Asdthegreat, Asocall, Badger
Drink, Band Geek 143, Born2x, Btyner, Can't sleep, clown will eat me, Chochopk, Clerks, Conant Webb, Crowboy, Day viewing, Derex, Drazil91, Drewshaker, Drewwiki, Dsol, Edward,
Euchiasmus, Femto, Feydey, Fxman, Glen, Graemec2, GreatWhiteNortherner, GregorB, Harryboyles, Hdt83, Hu12, Iamcrazy, Ioannes Pragensis, Itwern, J.delanoy, John Nevard, John254,
Joseph Solis in Australia, Kevin Ryde, Lab-oratory, MartinDK, Matthew Platts, Mccready, Mcduffodonnell, Mcduffodonnell01, Merlion444, Mets501, Mgreenbe, Michael Hardy, Missa01,
Monkeyman, Movingboxes, Mporter, Neil916, NeonMerlin, Nickj222, Notinasnaid, Ohnoitsjamie, Old Guard, Pakaran, Pankajwillis, Patzak, Penbat, Pete8, Plasticup, Qamlof, Rizaldi, Rjwilmsi,
Ronnotel, Sargdub, SchfiftyThree, Seqsea, ShelfSkewed, Sheyne, Sidonuke, Sintaku, Smallbones, Sparkescorp, Subsolar, Takeiteasyfellow, Tasteslikechimp, Thetrader1234, TraderGod, V79,
Veinor, Waggers, Wayward, Ywtk, Zzuuzz, 164 anonymous edits

License
Creative Commons Attribution-Share Alike 3.0 Unported
http:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/

Common questions

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Forex trading is high-risk for retail investors due to several factors: it is a zero-sum game where an inexperienced trader competes against professional traders who have an information advantage and greater capital. Retail traders, often undercapitalized, face the issue of "gambler's ruin" where they are more likely to go bankrupt first in unfavorable trades . Moreover, high leverage, often between 50:1 and 200:1, is offered to retail clients, increasing the chance of significant losses continuously across trades . Additionally, hidden costs like the bid/ask spread, and potential for resettlement costs if a position is not closed daily, further exacerbate the risks .

High leverage contributes to retail forex trading risks by significantly magnifying both gains and losses. Although it allows traders to control larger positions with less capital, the increased potential for large losses makes it risky. Many retail traders, who have less capital and experience, are more likely to suffer margin calls or total capital loss, as they might not withstand adverse market movements .

Leverage in forex trading allows traders to control large positions with a relatively small capital investment. While professional traders seldom use more than 10:1 leverage, retail traders might be offered leverage ranges from 50:1 to 200:1 . This high leverage amplifies both potential gains and losses, leading to increased trading volume and profits for the market maker. However, it also heightens the risk for margin calls, drastically increasing the likelihood of substantial losses for traders .

Forex scams exploit retail traders by promising high profits with low risk, often diverting investments for personal gain instead of genuine market trading . These scams involve churning accounts for commissions, selling purportedly profitable software, and executing Ponzi schemes . The impact is severe, with data indicating substantial financial losses; from 2001 to 2007, around 26,000 individuals lost $460 million to such frauds . The schemes have increased distrust and financial vulnerability among retail traders .

The concept of a zero-sum game in the foreign exchange market suggests that the gains of one trader are balanced by the losses of another. This essentially means that for every profit made, there is an equivalent loss suffered by another trader, excluding transaction costs which render it technically a 'negative-sum' game . Well-capitalized and informed traders, such as banks, typically have a trading advantage, whereas undercapitalized retail traders are at a disadvantage, increasing their risk of losses in the market .

Regulatory bodies, such as the CFTC and the National Futures Association, have responded to increased forex fraud by implementing measures like establishing a special task force to address rising fraud cases and proposing regulations to cap leverage at 10:1 . These efforts aim to enhance market transparency, protect investors, and deter the targeting of unsophisticated traders .

Risk capital refers to funds that one can afford to lose without adversely affecting their financial stability, as trading forex carries a high level of risk and is not suitable for all investors. The National Futures Association emphasizes that only such risk capital should be used for speculative activities like forex trading, underscoring the significant potential for loss inherent in the market .

Retail forex brokers have been implicated in several deceptive practices, including false advertising of low-risk, high-profit opportunities, churning accounts to earn commissions, misleading clients with faulty software, and involvement in Ponzi schemes . They have exploited regulatory gaps, targeted unsophisticated and vulnerable individuals, and delivered poor responsiveness to customer complaints, all contributing to widespread misinformation and financial losses for retail traders .

To combat forex fraud, the U.S. Commodity Futures Trading Commission (CFTC) established a special task force in 2008 . Additionally, in January 2010, the CFTC proposed new rules to limit leverage to 10:1, addressing issues of solicitation fraud, lack of pricing transparency, and targeting of vulnerable individuals . These measures aim to protect investors and increase regulatory oversight within the forex market .

The 'gambler's ruin' problem refers to the increased probability that an undercapitalized trader will go bankrupt when competing with better-capitalized traders or entities. In forex trading, retail traders, typically less funded than institutional players, are highly vulnerable. As they face trades with an 'information disadvantage' against experienced professionals, any set of losses is more likely to deplete their available capital, forcing them out of the game before potentially realizing gains .

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