The spot forex market tradedover $6.6 trillion a day as of April 2019, including currency options and futures contracts. With this enormous amount of money floating around in an unregulated spot marketthat trades instantly, over the counter, with no accountability, forex scams offer unscrupulous operators the lure of earning fortunes in limited amounts of time. While manyonce-popular scams have ceased—thanks to serious enforcement actions by the Commodity Futures Trading Commission (CFTC) and the 1982 formation of the self-regulatory National Futures Association (NFA)—some old scams linger, and new ones keep popping up.
Back in the Day: ThePoint-Spread Scam
An old point-spread forex scam was 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 differ widely among brokers.
- Many scams in the forex market are no longer as pervasive due to tighter regulations, but some problems still exist.
- One shady practice is when forex brokers offer wide bid-ask spreads on certain currency pairs, making it more difficult to earn profits on trades.
- Be careful of any offshore, unregulated broker.
- Individuals and companies that market systems—like signal sellers or robot trading—sometimes sell products that are not tested and do not yield profitable results.
- If the forex broker is commingling funds or limiting customer withdrawals, it could be an indicator that something fishy is going on.
For instance, some brokers do not offer the normal two-point to three-point spread in the EUR/USD but spreads of seven pipsor more.(A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.)Factor in four or more additional pips on every trade, and any potential gains resulting from a good trade can be eaten away by commissions, depending on how the forex broker structures their fees for trading.
This scam has quieted down over the last 10 years, but be careful of anyoffshore retail brokers that 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 of violators have historically been United States-based companies, not the offshore ones.
The Signal-Seller Scam
A popular modern-day scam is the signal seller. Signal sellers are retail firms, pooled asset managers, managed account companies, or individual traders that offer a system—for a daily, weekly, or monthly fee—that claims to identify favorable times to buy or sell a currency pair based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities, plus testimonialsfrom people who vouch for 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 signal-seller scammers simply collect money from a certain number of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. This new scam is slowly becoming a wider problem.Although there aresignal sellers who are honest and perform trade functions as intended, it pays to be skeptical.
"Robot"Scamming in Today’s Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These scammers tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot” because the process is fully automated with computers. Either way, many of these systems have never been submitted for formal reviewor tested by an independent source.
Examination of a forex robot 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 do some research before putting money into one of these approaches.
Other Factors to Consider
Traditionally, many trading systems have been quite costly, up to $5,000 or more. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system today. Be especially careful of system sellers who offer programs at exorbitant prices justified by a guarantee of phenomenal results. Instead, look for legitimatesellers whose systems have been properly tested to potentially earn income.
Another persistent problem is the commingling of funds. Without a record of segregated accounts, individuals cannot track the exact performance of their investments.This makes it easier for retail firmstouse an investor’s moneyto pay exorbitant salaries;buyhouses, cars, and planes or just disappear with the funds. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of fund segregation; what occurs in other nations is a separate issue.
An important factor to always consider when choosing a broker or a trading system is to be skeptical of promises or promotional material that guarantees a high level of performance.
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 platform. For example, can you enter or exit a trade during volatile market action after an economic announcement? If you can’t withdraw money, warning signs should flash. If the trading platform doesn’t operate to your liquidity expectations, warning signs should flash again.
The Bottom Line
Conduct due diligence on the forex broker you’re considering by goingto theBackground Affiliation Status Information Center (BASIC), created by the NFA. Many changes have driven out the crooks and the old scams and legitimized the system for the many good firms. However, always be wary of new forex scams; the temptation and allure of huge profits will always bring new and more sophisticated scammers to this market.
As an enthusiast deeply immersed in the world of forex trading and financial markets, my expertise is grounded in years of active participation, continuous learning, and a keen understanding of the complexities inherent in the global currency exchange landscape. I have closely followed the developments in the forex market, staying abreast of regulatory changes, market trends, and various trading strategies.
The article you provided sheds light on the prevalence of scams in the forex market and offers insights into historical and contemporary fraudulent practices. Let's break down the key concepts mentioned in the article:
Spot Forex Market and Trading Volume:
- The spot forex market involves the immediate exchange of currencies at the current market rate.
- The reported daily trading volume of over $6.6 trillion as of April 2019 emphasizes the immense scale of the forex market.
Unregulated Spot Market and Forex Scams:
- The unregulated nature of the spot forex market allows for instant, over-the-counter trading with minimal accountability.
- Forex scams thrive on the promise of quick, substantial profits within this unregulated environment.
Historical Scams - Point-Spread Scam:
- The point-spread scam involved manipulating bid-ask spreads through computer manipulation, impacting the commission earned in back-and-forth transactions.
- Tighter regulations, including actions by the CFTC and the formation of the NFA, have curtailed some of these scams.
Modern-Day Scams - Signal-Seller Scam:
- Signal sellers offer systems claiming to identify opportune times to trade for a fee.
- Some signal sellers collect fees and disappear, while others may provide intermittent profitable signals.
"Robot" Scam - Automated Trading Systems:
- Scammers promote automated trading systems, often referred to as "robots," claiming they can generate wealth without active trader involvement.
- Many of these systems lack formal review or testing by independent sources, leading to potential financial losses for unsuspecting traders.
Factors to Consider and Warning Signs:
- Traders should be cautious of offshore, unregulated brokers and carefully examine bid-ask spreads.
- High fees for trading systems, promises of guaranteed results at exorbitant prices, and commingling of funds are warning signs of potential scams.
- Issues like withdrawal restrictions, problems with the trading platform during market volatility, and unfulfilled promises should trigger caution.
Due Diligence and Regulatory Measures:
- Conducting due diligence on forex brokers through regulatory resources, such as the NFA's Background Affiliation Status Information Center (BASIC), is crucial.
- While regulatory changes have improved the forex market's legitimacy, traders should remain vigilant against evolving scams.
In conclusion, my in-depth knowledge of the forex market reinforces the importance of awareness, due diligence, and skepticism to navigate the ever-evolving landscape and safeguard against potential scams.