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  • Forex Fraud Protection 101

    Posted on August 16th, 2010 J No comments

    Until the late 1990’s, the foreign-exchange market was largely reserved for banks, hedge funds, and very wealthy individuals.  Small retail traders could not access the market due to several reasons, one of them being the minimum contract size of $100,000 to $1,000,000.  However, the advance of technology and internet in the last 10-15 years has changed that.  Today traders can open an FX account for as little as $100 and begin trading.
    This transformation and opening of the FX Market has caused thousands of investors to begin trading in the world’s largest market.  Likewise, hundreds of brokers have popped up in the United States alone, offering trading services to small retail clients.  This enormous growth and forward movement in the FX Market has not come without consequences, though.
    The FX Market is a decentralized market.  It does not have a central exchange such as the New York Stock Exchange or other major equity and future exchanges around the world.  Instead, it is a loosely connected network of international banks, and therefore the market operates 24 hours per day 6 days per week, as banks in different time zones open and close operations each day.  The fact that the FX Market is decentralized creates several difficulties, and one of the primary ones is regulatory oversight.  Since the market is international and decentralized, it is very difficult to regulate activity, and this unfortunate lack of regulation has created a vacuum of sorts for con artists and scammers to sneak in and take advantage of unknowing investors.
    Unregistered Brokers
    Since the FX Market is international, an unhealthy trend of unregulated brokers has developed in the last decade.  Generally, these firms will operate in the United States, but their legal entity will be listed offshore.  This frees these brokers from all regulatory oversight, and they can virtually operate in any way they choose.  Unfortunately, many times the way they choose to operate is unethical.
    One commons scam these “bucket shops” will engage in is to open up the brokerage, solicit clients through online marketing and advertising, and then when enough depositors have placed capital with the firm, they will simply close up shop one day, withdraw all deposited funds, and make off with millions of dollars; then, after a short period time, the same guys will open a new operation under a different name and do the same thing.  This has happened many times in the last ten years, and due to the lack of regulatory oversight in the FX Market, there is generally nothing an investor can do to get back any of his capital.
    Unregistered Financial Professionals
    In the same way that brokers fly under the radar, traders and investment firms will do the same.  There are many purported FX Traders who solicit funds from clients and then trade those funds in unregistered investment funds.  The risks associated with this type of an investment are enormous.  First of all, these traders and investment firms are not subject to any regulatory oversight, so they can easily manipulate reports and give false information regarding performance.
    How To Protect Yourself Against These Scams
    The safest thing to do as an investor is only invest with fully registered investment professionals.  In the FX Market in the United States that means investing with professionals who are fully registered and in good standing with the National Futures Association (NFA).  This one single step can save investors lots of time and money.  No one can guarantee that a registered professional is 100% honest.  The Bernie Madoff debacle proved that.  However, it does increase the chances of legitimacy significantly.  The best forex brokers to conduct business with are those who are fully registered and compliant with the NFA.

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