FOREX... THE CATCHY NAME TO WATCH OUT FOR!
FOREX., the FOReign EXchange, the cash foreign currency business. This business of trading in cash currency around the world is necessary and has been a viable way for major banks and businesses to protect themselves from exchange rate risk for probably hundreds of years. It is an important and legitimate business, and has always been done through world banks.
Then came the speculator and along with that came the "trading" in cash currency. Still done through the banks and even through some honest clearing firms that handled the business as a service to their securities or futures trading customers. The commissions charged on such transactions varied, of course, but for the most part the fees were very reasonable, and in a case known personally the charge was $35 for each full contract of the currency traded as a cash transaction. There was also the "spread" between the bid and ask price of the cash contract exchange rate. This difference was usually equal to a cost of between $25 and $50 depending upon the supply of, or the demand for the particular currency involved.
Now comes the con... Since the FOREX business is not currently regulated - THAT'S RIGHT, NOT REGULATED - it is destined to become the scam of the 90s which will probably carry into the year 2000 and on into the new millenium. Some of you will remember the scam of the 80s, the gold and silver leveraged metals programs. There are only a few of those firms left, and they are the firms that operate legally and honestly (like the banks in FOREX). For those who don't remember, I must elaborate. As an unregulated business, the cash metal con-artists would call at all hours of the day and night to intimidate the uninitiated investor and make all sorts of claims, with all manner of intimidation. When the customer was tired of being called an idiot for not mortgaging his house to "get in" on this hot deal, and when he had been convinced that this was a "can't miss" proposition, the prospect would send from $2,000 to $50,000 to invest in the metal. The "bucket shops" would then use the money to pay the high pressure sales person their 25%, and the owners would pocket the rest. If the metal ever did move into a profitable position, the owners of the scam operation would simply close shop, move two blocks away and open under a different name.
Are we headed that way with FOREX? You tell me. I have been working with the compliance side of the futures business for many years, and I personally have known (and could name) at least four, and probably six persons that have been barred from the futures business for being convicted of some sort of customer fraud. Where are they now? They run FOREX operations. They advertise continually on radio and infomercial TV. They are not regulated so they and their sales persons can, and will say anything they must to get you and others into their scam. What are the charges to do this business? How about one operation that states they won't charge you a commission, only the "spread" (from the bid to the ask price). The spread they quote may be as much as 30 to 80 points. That is equal to between $375 and $1000 to do the trade. Others may only charge a 10 point spread ($125) but also a commission of $200.
I cited four to six people that I know that have taken to the FOREX scam, but be sure to know that several of these operations open every month if not every week. Avoid the scam. If you insist in doing FOREX business, do it through a legitimate house. You will have a good idea of their legitimacy by the spread and commissions they charge, but don't let that be the only factor for your decision. Think about how the program was presented to you by the sales person. Did you feel pressured to "do it now", it "can't miss", "you'd be a fool if you didn't get involved in this", "$10,000 could return you $100,000 in less than a month"... etc. Refuse to be a victim!!!
Keep in mind that you can trade foreign currency on the futures markets, and the futures markets are probably the most regulated markets in the U.S. today. If you look carefully and compare, you will be surprised to learn that the futures markets are even more regulated than the securities industry. You may not want to believe that, but look into what both industries allow and what they do not allow, and the surprise is there waiting for you.
Please stick with the futures markets and help put the scam FOREX operations out of business.
Where are the regulators? Very good question! Since these operations do not fall under the National Futures Association and the Commodity Futures Trading Commission, those organizations cannot interfere. It would appear to me that this business most closely belongs in the category of banking or foreign banking. For that reason I think it's time that the banking regulators take a look at this business and somehow find a way to put an end to the scams. This type of business does, of course, hurt the futures industry since some people feel, or are given the impression that they are trading futures contracts. For this reason, I also feel that if it is not now being done, the NFA and CFTC should be sitting down with the banking regulators to find a way to stop this nonsense.
The honest people in the futures business catch heat from the regulators about such minor issues, and many honest business are either put out of business or leave the business because of intimidation from the regulators. Well, it is far past the time that the federal agency and the self regulatory organization for the futures industry work to help us improve this industry instead of trying to destroy it, and to help the honest firms by eliminating the scam operation that give us and them a bad name!
In the past, some traders were victims of non-refunded accounts when many forex brokers went unsuccessful with their business operation. Hence, they started to implement strict laws in US and UK that governs the forex brokers. It is important to note that your preferred forex brokers should be regulated either by the CFTC or NFA in the US and FSA in the UK. These will ensure that you are dealing with legitimate brokers.
