The spot forex market, clocking over $6.6 trillion daily trade as of April 2019, encompasses currency options and futures contracts.1 Within this vast market, where instantaneous over-the-counter trades occur sans regulation, forex scams pose a threat. Although stringent measures and the establishment of regulatory bodies have curbed many scams, persistent risks and frauds still linger.
Back in the Day: The Point-Spread Scam
An antiquated point-spread forex scam centered on manipulating bid-ask spreads through computer intervention. These spreads signify the commission involved in a broker’s transaction. The scam exploited the disparities in these spreads among brokers.
KEY TAKEAWAYS
While some traditional forex scams have waned due to tighter regulations, remnants endure, and novel scams persist. Shady practices involve brokers offering wide bid-ask spreads on certain currency pairs, impacting potential profits. Caution is advised with offshore, unregulated brokers. Systems marketed by individuals or companies may lack testing, resulting in unprofitable outcomes. Indicators of a potential scam include fund commingling or limitations on customer withdrawals by forex brokers.
For instance, certain brokers deviate from the customary two-point to three-point spread in the EUR/USD pair, opting for spreads of seven pips or more. (A pip is the smallest price move in a given exchange rate, reflecting the last decimal point’s change.) Factoring in an additional four or more pips on each trade, commissions may erode gains, depending on the broker’s fee structure.
Although this scam has diminished over the past decade, caution is warranted with offshore retail brokers lacking CFTC or NFA regulation. Notwithstanding, violators are more commonly U.S.-based entities than offshore counterparts.
The Signal-Seller Scam
A prevalent scam today involves signal sellers—retail firms, pooled asset managers, or individual traders offering trading recommendations for a fee. They claim to identify opportune moments to buy or sell currencies, promising substantial wealth. The unsuspecting trader is enticed to pay for trade recommendations.
While some signal sellers operate transparently, others disappear after collecting funds. Skepticism is advised, considering the potential for misuse.
“Robot” Scams in Today’s Market
A persistent scam, both in the past and present, revolves around forex-developed trading systems. These systems, often termed “robots” due to their fully automated nature, promise automated trades that accumulate wealth even during periods of inactivity. However, many of these systems lack formal reviews or independent testing.
Evaluating a forex robot involves scrutinizing the system’s parameters and optimization codes. Invalid parameters and optimization codes result in random signals, essentially transforming trading into a gamble. While tested systems exist, thorough research is essential before committing funds.
Other Considerations
Another recurring issue is fund commingling. Without segregated accounts, investors cannot accurately track their investments’ performance, creating an opportunity for misuse. This allows retail firms to utilize an investor’s funds for extravagant salaries, acquiring properties, vehicles, and yachts, or simply vanishing with the capital. Section 4D of the Commodity Futures Modernization Act of 2000 specifically tackled the matter of fund segregation within the United States; the scenario in other nations remains a distinct concern.2
IMPORTANT
– An essential aspect to consider when selecting a broker or trading system is skepticism toward promises or promotional materials guaranteeing high-performance levels.
– Further red flags include brokers hindering fund withdrawals or platform malfunctions during volatile market conditions.
The Bottom Line
Thorough due diligence is imperative when considering a forex broker. Resources like the Background Affiliation Status Information Center (BASIC), established by the NFA, provide invaluable insights.
Despite significant improvements that have driven out many malevolent actors, remaining vigilant against new scams is essential to navigate the forex market safely.