Is all quiet on the Forex Industry fraud front lines? In 2017, we became accustomed to weekly barrages from the various major regulatory bodies across the planet, as if organized crime had overtaken our industry by storm. Much has been written about probable impacts of this tightening of the screws by regulators and would it harm or help retail forex trading, but so far, 2018 has been quiet with regards to fraud issues. Yes, the normal newsmakers have been front and center – Teddy Sagi and Playtech, CySEC finally fining a few objectionable brokers, FXCM and Leucadia, and attempts to squash forex scams in Malaysia, but, otherwise, the tenor has been rather subdued.
With all of the hoopla created by regulators last year, it is time for them to muster their own resources and provide active oversight to see if anyone was listening to their previous diatribes. While we wait for demonstrative action in the marketplace, industry analysts are pondering the bigger question – Why cannot our industry raise its quality bar to a higher level? What is holding it back? In the article to follow, we will review what our favorites are up to and what insiders feel is holding us back from a leap in quality.
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Let’s step back a moment and apprise how our industry is organized:
We, as retail traders, are at the bottom of the food chain, so to speak. While the “Big Boys” compete at the high level on price and quality, we can only hope that the benefits of such struggles will trickle down to our Market Makers and be reflected in the products and services that they provide to us. Yes, a small percentage of retail traders have enough volume to qualify for direct access and its benefits, but the overwhelming majority of us, some 98%, are beholding to our brokers’ whims and delivery practices.
As we have written in several previous articles, the worldwide regulatory establishment put on a full-court press over the past two years due to the outrageous scandals that had taken place at the very top of this diagram. Major Banks had been caught with their hands in the proverbial cookie jar, fixing foreign exchange rates, as well as indices in other industries, to their benefit and dismissing these unethical practices with comments like, “If you ain’t cheating, you ain’t trying!”
Various research studies, internal reviews, and soul searching followed, as well as a raft of new rules, regulations, and guidelines, all of a restrictive nature that threatened to cripple an industry that was already in consolidation mode, due to declining revenue volumes. The cycle of rapid growth and then consolidation is actually a healthy formula for most any industry. The deck chairs get rearranged. There are winners and losers, but eventually, the industry players that arise from the smoke are better for it. Much of the “crabgrass” is cleared away, and entities resume competing on price and quality.
What is happening of late with the major newsmakers in our industry?
Here are a few tidbits on the items we noted above – “Teddy Sagi and Playtech, CySEC finally fining a few objectionable brokers, FXCM and Leucadia, and attempts to squash forex scams in Malaysia”:
- Teddy Sagi and Playtech: The barometer of the industry’s overall financial health can often be gleaned by observing published results from large public companies. The following chart did not impress in that regard:
One headline report read as follows: “Online gaming and financial trading systems giant Playtech PLC (LON:PTEC) has announced its results for the full year 2017, indicating a major slowdown in most key business units in the second half of the year. Overall, Playtech revenues in 2H-2017 totaled €385.5 million, down 9% from the first half’s €421.6 million. And that, despite the company having made a number of acquisitions during the year.”
One could still take solace in the fact that total revenues for 2017 exceeded those for 2016, as depicted in the visual, but current trends are the issue. Company executives tried to blame a portion of the problem on what it called “crypto hype”, the frenzy over buying long positions in Bitcoin and Ripple, which did not allow for the normal hedging profit on the broker side of the equation, but $7.6 million, the figure stated in the release, is a far cry from the €39.8 million in the chart.
- CySEC Fining Activities: The reputation of this Cyprus regulator had been one of laxity and the ability top look the other way when marketing schemes and business practices of its licensees seemed to cross over the line. European officials at the top of the EU have put pressure on CySEC to clean up its act, and it has spent the last year pounding its chest while publishing directives right and left to police its domain. As some have suggested, however, activity is not necessarily a sign of achievement. Major abusers have not been fined, and for others, it is business as usual.
CySEC officials, on the other hand, have recently reacted, if only upon an audit that took place some three years back. Recent reports stated that, “The Board of the Cyprus Securities and Exchange Commission (CySEC) has informed the public that, at the meeting held on 13th November 2017, it has decided to impose a total administrative fine of €138.000 to CIF ICFD Ltd for non compliance. ICFD Ltd operates the iForex Retail FX brokerage brand.” Is this action the beginning of a new enforcement trend? Only time will tell.
- FXCM and Leucadia: If ever there were a poster child for the Swiss Franc Debacle of January 15, 2015, it would have to be FXCM. We have followed the travails of this forex broker from its desperate reach for bailout funds from Leucadia for $300 million, to the expulsion of it CEO Drew Niv, who was fined and banned from the U.S. forex market, and finally to the bankruptcy proceedings of its parent company, Global Brokerage Inc.
At this stage, Leucadia, “a well-respected, diversified company with a market cap approaching $9 billion,” is economically in control of the FXCM enterprise. It has even added its name to the branding of the firm. The logo for FXCM now concludes with “A Leucadia Company.” Leucadia has also announced in another press release that it has actually profited from its arrangement with FXCM to the tune of $53 million in excess of its $300 million outlay, and the future is still young when it comes to the potential for enrichment down the road.
- Malaysian Officials Shut Down a Forex Ponzi Scheme: As developing countries in Asia benefit from economic globalization, new minions of middle class investors have been seeking ways to increase their earnings on their newly accumulated wealth. As this wave of prosperity has swept across Asia, a crime tsunami of sorts has followed close behind, ready to pounce on unsuspecting victims with common schemes that have worked well on the other side of the globe.
If you were to read the headlines, Malaysia is rife with these kinds of fraudulent offerings, always promising returns that are far above market. One such scheme was shut down in February, but it may only be the tip of the iceberg. At this point, only 116 people have filed complaints totaling $1.6 million, but law enforcement officials have already seized assets valued at over $2.6 million. One report read: “In a typical Ponzi fashion, the perpetrators of the scheme have offered to their victims guaranteed returns. According to the police, investors were promised to receive 12 percent monthly.” Expect more to follow on these capers.
Can our industry raise its quality bar to a higher level?
There is an ongoing debate in the background that too many quality individuals have left the industry to pursue other interests, and that all that is left behind are shadier interests that could care less about the long-term health of retail forex trading. One commonly heard lament: “In today’s highly advanced world of enlightened retail traders, and the long-established empowerment of small companies to reach a global market now very much here to stay, it is anathema that there are still trends toward zero investment in quality, and that the now ancient method of lead buying and hoping to convert to (very short term and small value) clients is still very much alive and well.”
The advent of MetaTrader4 software was the great enabler of growth in our industry. Very little capital was necessary to set up a virtual broker site, buy leads, and then build a broad customer base. Profits came too easily and allowed for a major disconnect from the technological centers of the world, i.e., London, New York, Sydney and San Francisco. As a result, Israel became the hotbed of intellectual capital in our industry, but much of that asset has gradually been drained away, as the criminal element moved heavily into this market.
The lament now sounds more like this: “Pseudo-gangsters who are semi-literate and bear no resemblance to any member of the FinTech or financial services industry now run amok with their affiliate lead touting and binary options brands which have been proven to be the work of massive mafia-style crime gangs who threaten anyone who crosses them with physical violence, and have ripped off thousands of unsuspecting people globally, seeing this as a badge of honor.”
A shift toward quality is still possible, but globalization is also reshaping our industry. All eyes are on China and its developing neighbors with regards to future profits. Capital will unfortunately focus on Asian development needs, as opposed to investments in quality.
Last year was a bombastic period for the regulatory establishment across the planet. Yes, there was a great deal of chest pounding and hand wringing. New rules and regulations threatened to suffocate our fledgling industry, but the world, as we know it, has not come to an end. Will there be the expected follow through that must accompany such actions for them to be successful? Will investments in quality return unabated?
This year will be a year of adaptation and consolidation, in which winners and losers redefine what constitutes a well-run brokerage, one that competes on price and quality, stabilized by adequate capital reserves. Amidst these changes, be sure to keep abreast of your broker’s activities. Measure how quickly it adapts, markets new programs for your benefit, and how responsive its customer service department is to your needs. If you observe anything that disturbs you, then maybe it is time to consider a change, too.