Forex Trading

Foreign exchange trading, or “forex” for short, has trillions of dollars of trading every year. Brokers may promote “forex” trading as a way to diversify investing portfolios. Forex trading involves buying one currency and selling another. By purchasing foreign currencies, investors can hedge against a weak U.S. dollar. When the value of the dollar declines, the value of foreign currencies may increase.

Investors should know that this type of trading is more complex than ordinary stocks and bonds and carries significant risks. The risks may outweigh the purported benefits of diversification. According to the CFTC, two-thirds of forex traders lose money.

How Does Forex Trading Work?

Forex trades bet that one currency will increase in value relative to another. U.S. investors might use dollars to buy another currency if they believe the strength of that currency might increase.

• Forex trades involve a bid price and an ask price. The “bid” is the price a broker will pay to buy a foreign currency from a seller. The “ask” is the price the broker is asking for a currency. The bid-ask spread is the difference between those two numbers.
• In a forex trade, the investor buys the base currency and sells the quote currency. This simple exchange is called “spot trading.” Spot trading comprises the majority of forex trading.

Forex Derivatives

Investors may also choose from riskier forex derivative investments. Derivatives derive their value from an underlying asset. They include forwards, futures, options, and swaps.

• Forwards: These contracts give investors the option to buy or sell a foreign currency at a specified point in the future.
• Futures: Future trading contracts are legally binding. Investors are required to buy or sell a currency at a certain price.
• Options: With options, investors can buy a contract that gives them the right to buy or sell a currency at a certain price if the price of that underlying currency reaches a specified amount.
• Swaps: Swaps are agreements between two parties to simultaneously borrow one currency and lend another. Once the swap reaches its maturity date, the two parties exchange currencies at a predetermined exchange rate. The two parties are speculating based on their expectations of future exchange rates.

The Commodity Futures Trading Commission (CFTC) regulates commodity futures and options markets in the United States. Legitimate forex trading may take place on exchanges not approved by the CFTC, but investors should know that they are taking on more risk by trading with fewer regulatory protections. Off-exchange forex trades trade directly with the dealer. These dealers profit when investors lose money.

You can verify a forex investment is registered with the CFTC by calling 1-800-676-4632.

Did Your Broker Warn You of the Risks of Forex Investing?

Certain forex investments come with too much risk for the average retail investor. These are just a few of the risks associated with legitimate forex trading:

• Securities regulation differs from country to country – some countries do very little to prevent securities fraud such as insider trading.
• Foreign currency prices may change based on a variety of factors. Civil unrest could cause the value of a currency to plummet.
• Forex trading that uses margin or leverage amplifies risk because it uses borrowed money. Make sure you understand how these forex trading strategies are supposed to work and ensure that you have sufficiently high risk tolerance before you invest.

Forex Investment Frauds

Scammers may use the allure of forex trading to tempt unsuspecting victims. They may rely on investors to assume that any lack of clarity stems from dealing with a foreign exchange.

Fake or Fraudulent Trading Platforms

When you trade off-exchange, you run the risk of dealer fraud. The dealer controls the trading platform, which means they can alter the prices on the screen to cheat unsuspecting traders.

Interbank Market

Fraudulent currency trading firms may promise investors that they will use their funds to trade on the “interbank market.” This should be a red flag since the interbank market is for banks and other financial institutions and not retail investors.

Online Scams

Forex trading exchanges or brokers that advertise online should not be taken seriously. If you send money to a stranger online, it may be impossible to get it back, especially if they live in a foreign country.

Fake Brokers

Do not work with a foreign broker. It is much harder to ascertain their registration. With a U.S. broker, you can verify their FINRA license by looking up their Central Registration Depository (CRD) number on BrokerCheck.

Signal Provider and Signal Robot Scams

Certain scammers have sold “signal providers” – subscription services that are supposed to alert investors to plum forex trading opportunities. In many cases, these “signal” robots have turned out to be fake. Other signal providers simply do not provide investors with the expected result or charge high fees. While there are legitimate signal providers, retail investors should not attempt to use them to make money.

“My Forex Funds”

The CFTC alleged in a complaint that My Forex Funds took more than $300 million from customers and promised to help them become professional traders. The company would supposedly allow investors to use its money to trade leveraged or margin forex contracts. According to the CFTC, these forex contracts were offered off-exchange and violated the law. My Forex Funds allegedly served as the counterparty to the vast majority of customers’ investments and made it impossible for certain customers to see legitimate profits from their trading. If users failed to reach certain profitability targets, My Forex Funds allegedly deleted their accounts.

Fraudulent Forex and Fake Returns

In 2014, the Financial Industry Regulatory Authority (FINRA) fined Western International Securities following allegations that the firm failed to supervise one of its representatives who allegedly solicited customers for investments in forex, stating that these investments could generate returns of 10.5% to 12% with “little to no risk.” As ever, promises of huge returns with no risk should serve as a red flag.

The broker, along with his firm Oxford PCG, allegedly persuaded investors to invest $47.3 million in the currency program. According to FINRA, the broker received a 4% commission for his customers’ forex investments. The SEC alleges that the broker and Oxford PCG lost $39.1 million of investor funds and paid the remaining $8.2 million to investors as fake “returns” on their investments.

The broker allegedly used millions of dollars he received from scam to pay for “million-dollar homes, luxury cars, foreign travel, country club expenses, and a suite at professional hockey games.”

What Can I Do If I Am the Victim of a Forex Fraud?

Report forex scams to the CFTC using their online complaint form, or call 866-366-2382.

If you worked with a FINRA-registered broker who recommended a fraudulent or overly risky forex investment, contact a securities attorney. Securities attorneys can hold brokerage firms accountable for these types of frauds, particularly in cases where the firms failed to supervise their brokers.

Contact us today to speak with a securities attorney about a potential forex fraud case against a brokerage firm. Call (877) 600-0098 or email info@kurtalawfirm.com.