Currency Trading

I can’t think of an area of investing individuals know less about than currencies.  (As an aside: We are currently writing a paper on currency investing strategies…)

Today there is an article in the LA Times on currency trading (note: I didn’t say investing).  FXCM and Gain are the two biggest brokers with a combined 260,000 accounts.  Roughly 75% of customers lost money every quarter (both are public and have to disclose such stats to the CFTC).  This is exacerbated by one simple metric: 50 to 1 leverage (that is down from 100-1 of a few years ago but still more than 2 times leverage allowed to stock traders).  You can also make a deposit by credit card.

The business model for forex trading is to burn the customer and then find another one,”  said Larry Harris, a USC professor and the former chief economicst at the SEC.

Gain ending up making an average of $2,913 from every active trader it had last year, even though the average bustomer account contained only $3,000.  FXCM was $2,641 and $3,658.

Michael Greenberger, a University of Maryland professor and head of trading and markets at the CFTC said, “Once you have things that are done off exchange you are pretty much at the mercy of the dealer – telling you what the price is,telling you what you owe.  Anybody I cared about – I’d say, ‘Stay away from this.'”

CFTC chairman Gary Gensler recently said it was the “largest area of retail fraud” his agency oversees.

Investor beware.