Foreign exchange fraud

Last updated
Foreign exchange
Exchange rates
Markets
Assets
Historical agreements
See also

Foreign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading became a common form of fraud in early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission. [1]

Contents

The foreign exchange market is at best a zero-sum game, [2] meaning that whatever one trader gains, another loses. However, brokerage commissions and other transaction costs are subtracted from the results of all traders, making foreign exchange a negative-sum game.

US Government interventions

In August 2008, the CFTC set up a special task force to deal with growing foreign exchange fraud. [3] In January 2010, the CFTC proposed new rules limiting leverage to 10 to 1, based on "a number of improper practices" in the retail foreign exchange market, "among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals". [4]

In 2012, Christopher Ehrman, an SEC veteran, was selected to run the new SEC Office of the Whistleblower. [5]

Types of fraud

Frauds might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, [6] improperly managed "managed accounts", [7] false advertising, [8] Ponzi schemes, and outright fraud. [9] [10] It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment. [11]

Increase in fraud

The U.S. Commodity Futures Trading Commission (CFTC), which regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry. [12] Between 2001 and 2006, the CFTC has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost US$350 million. From 2001 to 2007, about 26,000 people lost US$460 million in forex frauds. [1]

Not beating the market

The foreign exchange market is a zero-sum game [2] in which there are many experienced, well-capitalized professional traders (e.g. working for banks) who can devote their attention full-time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Retail traders are undercapitalized. Thus, they are subject to the problem of gambler's ruin: in a "fair game" (one with no information advantages) the player with the lower amount of capital has a higher probability of going bankrupt than a high-capital player. The retail trader always pays the bid/ask spread which makes their odds of winning less than those of a fair game. Additional costs may include margin interest or, if a spot position is kept open for more than one day, the trade may be "resettled" each day, each time costing the full bid/ask spread. In some variations of forex trading, the customers do not obtain normal fungible futures, but instead make a contract with some named company. Even if the company claims to act as their "forex dealer", it is financially interested in making the retail customer lose money. The contract is directly between the customer and the pseudo-dealer, so it is an off-exchange one; it cannot be normally registered and traded on futures exchanges. [13]

Although it is possible for a few experts to successfully arbitrage the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques, and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbitrages themselves are a rival good. In analogy: the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map.

High leverage

By offering high leverage, some market makers encourage traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases their profit, but increases the risk that the trader will receive a margin call. While professional currency dealers such as banks and hedge funds tend to use no more than 10:1 leverage, retail clients may be offered leverage up to 1000:1. [14] [15]

Fraud by country

To aid with transparency, some regulatory authorities openly publish the following: list of regulated companies/firms, warnings to regulated companies, cases opened against regulated companies, fines levied to regulated companies, revocation of companies license as well as general news announcements.

United Kingdom

The Financial Conduct Authority (FCA) website lists guides to aid with avoiding fraud/scams as well as public list of warnings recorded by the FCA.

Cyprus

The Cyprus Securities and Exchange Commission (CySEC) provides public access to information regarding the process for how to obtain a CIF authorisation as well as listed the current and past CySEC authorised companies.

Convicted scammers

See also

Related Research Articles

In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.

<span class="mw-page-title-main">Commodity Futures Trading Commission</span> Government agency

The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.

A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options, and fixed return options (FROs).

<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

In finance, a contract for difference (CFD) is a financial agreement between two parties, commonly referred to as the "buyer" and the "seller." The contract stipulates that the buyer will pay the seller the difference between the current value of an asset and its value at the time the contract was initiated. If the asset's price increases from the opening to the closing of the contract, the seller compensates the buyer for the increase, which constitutes the buyer's profit. Conversely, if the asset's price decreases, the buyer compensates the seller, resulting in a profit for the seller.

<span class="mw-page-title-main">National Futures Association</span> United States self-regulatory organization for derivatives

The National Futures Association (NFA) is the self-regulatory organization (SRO) for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex) and OTC derivatives (swaps). NFA is headquartered in Chicago and maintains an office in New York City. NFA is a non-profit, independent regulatory organization. NFA does not operate any markets and is not a trade association. NFA is financed from membership dues and assessment fees, and membership is mandatory for many market participants.

The Foreign Exchange Dealers Coalition (FXDC) was an alliance of the largest U.S. foreign exchange market dealers, that appears to have closed sometime after 2010. The FXDC partnership was formed in the fall of 2007 to pool industry resources to demonstrate the viability of the forex industry and to ensure fair regulation and oversight that does not hamper freedom of choice, innovation or job creation. The Coalition aimed to provide input to the proposals for major regulation changes at the time, including the required registration for Retail Foreign Exchange Dealers (RFEDs) with the National Futures Association.

<span class="mw-page-title-main">First Prudential Markets</span> Financial Markets

FP Markets (First Prudential Markets) is the trade name of FP Markets Group of Companies, a global online investment company.

Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. As of 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

FXCM, also known as Forex Capital Markets, is a retail foreign exchange broker for trading on the foreign exchange market. FXCM allows people to speculate on the foreign exchange market and provides trading in contract for difference (CFDs) on major indices and commodities such as gold and crude oil. It is based in London.

<span class="mw-page-title-main">Cyprus Securities and Exchange Commission</span> Financial regulator of Cyprus

The Cyprus Securities and Exchange Commission, better known as CySEC, is the financial regulatory agency of Cyprus. As an EU member state, CySEC's financial regulations and operations comply with the European MiFID financial harmonization law.

Foreign exchange regulation is a form of financial regulation specifically aimed at the Forex market that is decentralized and operates with no central exchange or clearing house. Due to its decentralized and global nature, the foreign exchange market has been more prone to foreign exchange fraud and has been less regulated than other financial markets.

<span class="mw-page-title-main">Banc De Binary</span> Israeli financial firm


Banc De Binary was an Israeli financial firm with a history of regulatory issues on three continents. On January 9, 2017, the company announced that it would be closing due to negative press coverage and its tarnished reputation. The firm also surrendered its brokerage license with the Cyprus Securities and Exchange Commission (CySEC) removing its ability to legally trade in the European Union. Its 2014 revenues were reported as $100 million.

<span class="mw-page-title-main">Plus500</span> British international financial firm

Plus500 is an Israeli-founded London-based firm that provides online trading services in contracts for difference (CFDs), share dealing, futures trading and options on futures. The company has subsidiaries in the UK, Cyprus, Australia, Israel, Seychelles, Singapore, Bulgaria, Estonia, the United States, Dubai, Indonesia, the Bahamas and Japan. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

The forex scandal is a 2013 financial scandal that involves the revelation, and subsequent investigation, that banks colluded for at least a decade to manipulate exchange rates on the forex market for their own financial gain. Market regulators in Asia, Switzerland, the United Kingdom, and the United States began to investigate the $4.7 trillion per day foreign exchange market (forex) after Bloomberg News reported in June 2013 that currency dealers said they had been front-running client orders and rigging the foreign exchange benchmark WM/Reuters rates by colluding with counterparts and pushing through trades before and during the 60-second windows when the benchmark rates are set. The behavior occurred daily in the spot foreign-exchange market and went on for at least a decade according to currency traders.

<span class="mw-page-title-main">Swissquote</span> Swiss banking group

Swissquote Group Holding SA is a Swiss banking group specialising in providing online financial and trading services. The Group's shares have been listed on the SIX Swiss Exchange under the ticker symbol “SQN” since 29 May 2000. Its headquarters are located in Gland, Switzerland. The company also has offices in Zurich, London, Dubai, Hong Kong, Malta, Cyprus, Bucharest, Singapore and Luxembourg, with more than 1,134 employees in 2023. Swissquote Bank Ltd holds a banking licence issued by its supervisory authority, the Swiss Financial Market Supervisory Authority (FINMA), and is a member of the Swiss Bankers Association (SBA). The Group's headquarters are located in Gland, Switzerland. The Group has 1040 employees as of December 2022.

<span class="mw-page-title-main">Fondex Global</span> Cypriot online brokerage

Fondex Global is a Cyprus registered online brokerage that provides financial trading in contracts for difference (CFD) on the currency markets, shares, ETFs, major indices and commodities such as precious metals; gold and crude oil.

<span class="mw-page-title-main">CFTC Whistleblower Program</span>

The Commodity Futures Trading Commission's Whistleblower Program was created with the 2010 passage of the Dodd–Frank Act. The program rewards individuals who report possible Commodity Exchange Act (CEA) violations. The program also extends anti-retaliation protections for whistleblowers who file claims.

<span class="mw-page-title-main">FxPro</span> Online brokerage based in London

FxPro is a London-based online broker that provides CFD contracts in foreign exchange, stocks, futures, and precious metals. It has offices in London and Cyprus and is regulated by several regulatory authorities.

References

  1. 1 2 Lindsay, Daniel (2014-01-20). "Regulatory Holes Provide A Playground For Forex Fraudsters". mahifx.com. Archived from the original on 2014-02-03. Retrieved 2014-01-28.
  2. 1 2 Douch, Nick (1989). The Economics of Foreign Exchange. Greenwood Press. pp. 87–90. ISBN   978-0-89930-499-1.
  3. ↑ "CFTC establishes task force on currency fraud". USA Today. Associated Press. 2007-08-11. Retrieved 2015-11-14.
  4. ↑ The Federal Register Archived 2010-08-28 at the Wayback Machine Section E. The Commission's Proposed Rules
  5. ↑ Rachel Louise Ensign. "Q&A: Christopher Ehrman, Director, CFTC's Whistleblower Office". WSJ.
  6. ↑ SOFTWARE VENDOR CHARGED CFTC News Release 4789-03, May 21, 2003
  7. ↑ CFTC complaint Archived 2006-03-01 at the Wayback Machine Forex Advisory Firm and Trade Risk Management Firm Charged With Fraud
  8. ↑ Fraud charges against multiple forex Firms Archived 2006-04-21 at the Wayback Machine Commodity Futures Trading Commission (CFTC) Release: 4946-0
  9. ↑ "Forex Fraud Investor Alert Archived 2008-10-29 at the Wayback Machine ". North American Securities Administrators Association, accessed January 12, 2008
  10. ↑ Foreign Currency Fraud Action Archived 2006-06-14 at the Wayback Machine Commodity Futures Trading Commission (CFTC) vs. Donald O’Neill
  11. ↑ FOREX Advisory Commodity Futures Trading Commission's FOREIGN CURRENCY TRADING FRAUDS
  12. ↑ "Foreign Currency Trading" . Retrieved 2019-09-17.
  13. ↑ "Foreign Exchange Controls". Top Forex News. Retrieved 17 December 2013.
  14. ↑ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100". The New York Times . Retrieved 2007-10-30.
  15. ↑ Elam, Yohay (2016-01-28). "Beware of brokers offering high leverage". Forex Crunch. Retrieved 2020-01-25.
  16. ↑ "How to avoid scams - Financial Conduct Authority". fca.org.uk. 28 February 2023.
  17. ↑ "Report a suspected scam". fca.org.uk. 4 March 2020.
  18. ↑ "Consumers - Financial Conduct Authority". fca.org.uk. 8 August 2017.
  19. ↑ "News". fca.org.uk. Archived from the original on 2015-06-10.
  20. ↑ "Cyprus Securities and Exchange Commission - INVESTMENT FIRMS (CYPRIOT)". cysec.gov.cy.
  21. ↑ "Cyprus Securities and Exchange Commission - FORMER INVESTMENT FIRMS (CYPRIOT)". cysec.gov.cy.
  22. ↑ "Cyprus Securities and Exchange Commission - CYSEC WARNINGS". cysec.gov.cy.
  23. ↑ "Cyprus Securities and Exchange Commission - BOARD DECISIONS". cysec.gov.cy.
  24. ↑ "Owners of currency exchange business that made $600 million convicted of fraud" (Press release). Georgia, USA: U.S. Attorney’s Office, Northern District of Georgia. Department of Justice. 2018-10-10. Retrieved 2018-11-20.
  25. ↑ "Poliisi - 404". poliisi.fi. Archived from the original on 2015-05-10.
  26. ↑ Helsinki Times Over 700 criminal complaints on WinCapita -Finnish police, August 13, 2008
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.