Retail Forex: the 40-Ounce of Financial Markets

by Paul Springer

Pitches for retail foreign-exchange trading companies contain some pretty arresting claims. Individuals are enticed with $50 micro accounts, king-sized leverage of up to 200:1, and huge profits made with limited risk.

And investors are often promised that despite the gigantic leverage, they won’t be allowed to lose more money than they ponied up.

The approach resonates with the ugly trend in marketing fortified alcoholic beverages to minority groups, but here the appeal is to tap absolutely anyone with 50 bucks and a pulse.

Recently TraderDaily looked at some enforcement actions that showed how forex firms improperly skewed the odds against clients. Now the National Futures Association has revealed more of what investors can expect when forex trading goes wrong.

The NFA recently announced settlements with introducing broker (IB)  Commodity Trading International Corp. (CTI) and some of its principals, who the NFA says engaged in a “systematic pattern of fraud” in its dealings with both the NFA and CTI clients.

The broker used deceptive material in soliciting customers, according to the NFA’s complaint. CTI represented to NFA that the only promotional material it used was on its website. But a clandestine stealth marketing pitch was allegedly designed to sidestep regulation. A client talked to one of the principals in a video, which the client/shill was then able to use to solicit other potential clients under an arrangement where he would be paid for referrals.

The video, NFA says, contained the overblown claims that were not made officially on the website. Here is one exchange on the video where the client and principal talk about risk and reward:

[Client]: “So what you said earlier is that I should expect on a conservative program to earn 1, 2, maybe 3 percent a month on average.”

Principal: “Yes, in a very conservative program, I mean, based on the past performance, realize you’re looking at an average, anything from 1 to 3 percent per month. That’s not per year. That’s per month and that’s something that our clients have been enjoying the past few years and that is based on very conservative factors. In fact, one of the worst years we had was 2001 and one of our CTAs walked away with 31.73% and that was based even on the situation that happened in September.”

Aside from claiming returns CTI never achieved, the principal’s claim of performance data going back to 2001 was hilariously impossible — CTI only started doing business in 2007.

Another ludicrous claim involved selling options. “CME states that 78% of the options that are sold in the market always end up expiring worthless, zero, they never get anywhere. So what does this mean for us? As option sellers, we [are] always going to be 78% of the time winners.”

The proof of the options theory was in the pudding, NGA says:

In reality, shorting options–which was a strategy CTI used in trading its customers’ accounts–involves a great deal of risk, and can result in customers losing more than their original investment. Indeed, the best evidence of the significant risks associated with this type of trading was the losing performance of CTI’s customer accounts.

What does all this mean in dollars and cents? Here’s one painful example:

[The client] opened an account through CTI in June 2008 with a deposit of approximately $500,000… and losses in September and October 2008 totaled approximately $385,000. From mid-October 2008 through September 2009, his account was traded by CTl. During that time, [client’s] account lost all of its remaining funds, and had a debit balance of approximately $3,000 as of September 16, 2009.

Meanwhile, CTI allegedly engaged in deceptive communication with NFA:

CTI’s dealings with NFA were also deceptive and misleading and marked by halftruths and vague and evasive answers from CTI and its principals evidently designed to mislead NFA’s auditors regarding the firm’s operations.

This behavior continued even after CTI had supposedly closed its doors:

For example, subsequent to audit fieldwork, CTI represented to NFA that it had ceased trading customer accounts and was no longer conducting any business. However, NFA learned that this representation by CTI was untrue and that CTI had devised a scheme, using “straw men” IBs, and fraudulent account opening documents, to make it appear that its customer accounts were transferred to a new futures commission merchant (FCM) and introduced by new IBs. In truth, however, CTI continued to service and trade these customer accounts, all the while lying to NFA about its activities.

The outcome for the alleged culprits isn’t going to do much for defrauded clients. Two principals were barred for seven years, and they will have to pay a $50,000 fine if they reapply to NFA at that time.

CTI is out of business for good, but it took almost a year for the regulators to achieve that goal, a goal which attainment was delayed by CTI’s continuing to trade even after it claimed it had shut down.

Match that up with the timeline for the client’s losses in the example: It took only four months to incinerate the first $115,000.

While there are plenty of legit forex brokers in business, it’s abundantly clear that no one’s claims should be taken on faith.

And don’t forget the first rule of derivatives trading: No matter how much money you can make, you can always lose more faster — much more than you had in the first place.

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