Spotting A Forex Scam
The spot forex market is said to trade at over $1 trillion a day. Combine that with currency options and futures contracts, and the amounts could literally be another couple of trillion traded on any given day.
SEE: Forex Walkthrough
In its 2009 report, the Foreign Exchange Committee at the Bank of International Settlements estimated the total numbers of forex related transactions to be $3.2 trillion. With this type of money floating around an unregulated spot market that trades over the counter with no accountability, forex scams can only increase with the lure of earning fortunes in limited amounts of time. Many of the old popular scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commission (CFTC) and the 1982 formation of the self-regulatory National Futures Association. However, many scams still exist, and new ones keep arising
The old forex scam was founded based on computer manipulation of bid/ask spreads. The point spread between the bid and ask basically reflects the commission of a back and forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads widely differ among brokers. Brokers often do not offer the normal two- to three-point spread in the EUR/USD, for example, but spreads of seven pips or more. Factor four or more pips on every $1 million trade, and any potential gains resulting from a good investment are eaten away by commissions. This scam has quieted down over the last 10 years, but be careful of those offshore retail brokers who are not regulated by the CFTC, NFA or their nation of origin. These tendencies still exist and it's quite easy for firms to pack up and disappear with the money when confronted with actions. Many saw a jail cell for these computer manipulations. But the majority violators have historically been United States-based companies, not the offshore ones.
SEE: 5 Tips For Selecting A Forex Broker
Signaling the Scam
A popular modern-day scam is the signal seller. Signal sellers are people who may be a retail firm, pooled asset manager, managed account company or individual trader who promises to trade based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities with backing by people who will practically testify in court on how great a trader and friend the person is, and the vast wealth that this person has earned for them. All the unsuspecting trader has to do is hand over X amount of dollars for the privilege of trade recommendations. Many of these people simply collect money from a certain amount of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. While this new scam is slowly becoming a wider problem, many signal sellers are honest and perform trade functions as intended.
Scamming in Today's Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These people tout their system's ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is "robot," because of the ability to work automatically. Either
way, many of these systems have not been submitted and tested by an independent source for formal review. Examination factors must include the testing of a trading system's parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research the system they wish to implement into their trading strategy.
SEE: How To Place Orders With A Forex Broker
Other Factors to Consider
Traditionally, many trading systems have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system. Be especially careful of system sellers that offer programs at exorbitant prices justified by guaranteeing phenomenal results. Although many crooks sell systems, there are plenty of sellers who are decent and legitimate and have systems that have been properly tested to potentially earn substantial income.
SEE: Is Your Forex Broker A Scam?
Another persistent problem is the commingling of funds. Without a record of segregated accounts, individuals cannot track the exact performance of their investments. As a result, many principles of retail firms are able to pay exorbitant salaries, buy houses, cars and planes or just disappear with a customer's money. The allure for some is too great to perform the proper roles and duties. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of segregation. This act introduced strong regulating towards segregated brokerage accounts, allowing clients to opt out of such investment strategies. What occurs in other nations is a separate issue.
Other scams and warning signs exist when brokers won't allow the withdrawal of monies from investor accounts, or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can't withdraw money, warning signs should flash. If the trade station doesn't operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Of the 193 cases filed with the NFA in 2008 for rules and law violations, 166 were settled within nine months, but only 23% received lost funds. Therefore, similar to the circumstances that present themselves in a Ponzi scheme, even when those who deliberately engage in forex scams are brought to justice, investor reimbursement is not guaranteed.
SEE: 10 Forex Misconceptions
The Bottom Line
To investigate your broker, the Background Affiliation Status Information Center system was introduced. Many of these changes have driven out the crooks, the unwanted and the old scams and legitimized the system for the many good firms. However, always be wary of new forex scams, as the temptation and allure of huge profits will always bring new and more sophisticated types to this market.