The foreign currency exchange, or forex (FX), is a decentralised, electronic marketplace. It's the world's single largest trading venue and includes a wide variety of participants from every corner of the earth. Institutional investors, retail traders and liquidity providers engage the forex on a 24/5 basis, generating average daily volumes upwards of US$6 trillion. The robust participation promotes consistent liquidity and volatility, two attributes conducive to the creation of hedging and speculative opportunities.
The immense size of the forex poses a collection of unique regulatory challenges. There is no universal authority overseeing the FX market―governance varies by municipality. Due to the lack of a formal, centralised authority, some people claim that the forex is a "scam." Although many concerns regarding market security are justified, others are baseless. In reality, FX trading can be a safe, viable means of pursuing nearly any financial objective. As long as the trader resides in a receptive jurisdiction and secures the services of a reputable broker, the chance of being swindled can be exponentially reduced.
Is The Forex A Scam?
As a whole, no, the forex is not a scam. It's an open market where traders and investors interact through intermediaries, who profit from facilitating the dialogue. However, any capital venue with the size and popularity of the forex is a target for nefarious enterprise. While a vast majority of operators are on the up-and-up, there are shady participants that pursue profit through the exploitation of others.
Below are few ways in which scammers perpetrate FX fraud:
Signals & Systems Sales
One of the go-to hustles in the forex market is the sale of fraudulent trading signals and systems. The rise of social trading has opened the door for countless bad actors to market inauthentic trading methodologies to the public. These signals and systems often promise guaranteed returns supported by fake statistical track records and forged testimonials.
Not every forex broker is licensed, regulated and reputable. Many operate outside of anyone's jurisdiction and are free from compliance requirements. While some may be reputable, clients have few options for dispute resolution. This opens the door to a collection of broker-initiated fraud, ranging from embezzlement to spread manipulation.
Professionally-managed funds are nothing new and are commonplace in the futures, equities and forex markets. Despite their popularity, many dishonestly promise exorbitant returns to solicit customer funds.
Importance Of Vetting Providers
For retail traders, it's important to be aware of the scams listed above. Fortunately, fully-vetting signal & system providers, brokers and managed funds is relatively straightforward in the online space. Through a bit of research, one can establish if an entity is in good legal standing and reputable.
Further, as the financial industry continues to evolve, it will continue to implement new safe-guards and controls. As an example, advanced security systems saved U.K. traders and investors an estimated £1.8 billion in stolen funds during 2019.
Historically, scams are no stranger to the financial markets. Activities such as insider trading, crypto hacking and ponzi schemes often gain widespread attention, prompting public distrust. In many cases, the skepticism is well-founded. According to U.K. Finance, traders and investors lost £1.2 billion to fraud and scams in 2019. It's undeniable that many people fall victim to predatory financial operations and that much of the public suspicion toward the capital markets is justified.
FX Brokerage Scams
One of the most important facets of avoiding forex fraud is selecting a rock-solid brokerage service. A competent broker is one that is licensed, experienced and in good legal standing. Sadly, not all FX brokerages fit this criteria and look to profit from defrauding their clientele. Below are several scams commonly perpetrated by illegitimate FX brokers:
- Assignment of hidden fees and costs
- Spread manipulation
- Platform freezes or lockouts
Each of these items are underhanded ways for a broker to take advantage of a trader. To avoid brokerages that employ these practices, one can contact regional regulators to confirm a brokers registration, license status and disciplinary history. Below is a list of regulatory agencies residing over key forex regions:
- Australia, Australian Securities and Investment Commission (ASIC)
- Belgium, The Financial Services and Markets Authority (FSMA)
- Canada, Investment Industry Regulatory Organisation of Canada (IIROC)
- Dubai (UAE), Dubai Financial Services Authority (DFSA)
- France, Credit Institutions and Investment Firms Committee (CECEI)
- Germany, Federal Financial Supervisory Authority (BaFin)
- Hong Kong, Securities and Futures Commission (SFC)
- India, Securities and Exchange Board of India (SEBI)
- Ireland, Central Bank of Ireland (CBI)
- Japan, Financial Services Agency of Japan (FSA Japan)
- New Zealand, Financial Markets Authority (FMA)
- Singapore, Monetary Authority of Singapore (MAS)
- Switzerland, Swiss Financial Market Supervisory Authority (FINMA)
- United Kingdom (U.K.), U.K. Financial Services Authority (FSA U.K.)
- United States (U.S.), Financial Industry Regulatory Authority (FINRA)
Market manipulation is defined as being "the attempt or act to artificially change the price of a security or market movement with the intent to make a profit." The rise of technology in FX trading has made many previously impossible manipulative practices viable. These scams can be incredibly difficult to spot and account for, but their presence must be respected in the marketplace.
Spoofing is an illegal trading practice that occurs when a trader places a large buy or sell order with no intent to execute. This activity floods the market with "fake" orders, artificially influencing supply and demand.
2. Stop Running
Stop running is the act of driving price to certain levels to trigger large stop loss orders. While not deemed illegal, it can cause abnormal forex price action.
Layering is the placing of multiple orders at different price levels to skew perceived supply and demand levels. Similar to spoofing, layering artificially boosts market participation and can influence price action.
How To Avoid Scams
Although not all of the aforementioned practices are considered technically illegal, they can bring losses to unsuspecting traders. To avoid falling prey to such operations, as well as to outright fraud in general, the U.S. Commodity Futures Exchange Commission (CFTC) gives some advice to forex participants:
- Do not deposit more funds than you can afford to lose.
- Do not mortgage your home or cash in your savings.
- Margin trading can make you responsible for losses that greatly exceed your deposit. Do not trade forex if you cannot withstand the additional loss.
As of 2018, an estimated 13.9 million people traded forex worldwide. In addition, there are thousands of brokerage services, signal providers and FX funds in operation around the globe. Most of these participants engage the forex in an honest capacity, in pursuit of their financial goals. Nonetheless, there are scams and scammers out there, searching for victims and ways to "game the market."
For anyone interested in becoming an FX trader, performing adequate due diligence is important. Taking the time to question and fully vet any potential affiliations is vital to avoiding fraud. Although financial authorities are constantly working to enhance market integrity, it's important to take an active role one's own in forex security.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…