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You Too Can Make Millions With Unregulated, Leveraged Derivatives In Chile

Tyler Durden's picture




 

On Thursday we learned that becoming a millionaire is surprisingly easy. All you need to do is raise some startup capital, find a dying company whose stock is still fairly liquid, then loan the company money on the condition they allow you to convert the receivable into common at a discount to where it trades in the market. Somehow that’s legal even if, as Bloomberg noted (completely missing the irony of course), it’s too “sketchy” for Wall Street investment banks. 

On Friday, we got the story of ForexChile, an outfit out of Santiago that makes money on a similarly straight forward business model. According to Bloomberg, the company is Chile’s largest purveyor of CFDs. The concept is very simple. I sell you a contract that obligates me to pay you the difference between the current price of something, and the price of that something when you close the contract. That’s assuming you guess right on the direction of the price change. Of course in most cases you won’t (the house always wins) and if you guess wrong that means you pay me, and because you were leveraged in the first place, the market doesn’t have to move against you by much to wipe you out. Here’s more via Bloomberg

It’s noon inside the offices of ForexChile in Santiago, and dozens of salespeople are working the phones, talking up investments linked to everything from Facebook stock to copper futures. They hold out tantalizing prospects to those on the other end of the line: potential returns of 20 percent, 30 percent, even 40 percent.

 

Familiar, yes -- and illegal if this were the U.S. Because what these people are selling are neither stocks nor bonds nor futures nor funds. They are offering contracts for difference, financial derivatives that are off-limits to retail investors in the U.S. and highly regulated elsewhere…

 

How CFDs became a hot investment game in Chile is a story of savvy marketing and nonexistent oversight. Such contracts are allowed in two dozen other countries and are particularly popular in the U.K., where the value of annual trading is estimated to exceed $900 billion. There, as in Chile, these investments tend to draw small-time speculators. As with get-rich investments everywhere, most investors lose money most of the time…

 

But in most places, regulators police the market somehow. In Chile, no one does. Virtually anyone can sell or buy CFDs, regardless of their financial means or experience.

 

Most CFDs employ one of the most powerful forces in investing: leverage. In Chile, leverage sometimes stretches as high as 100 to 1.

As you might imagine, marketing unregulated, highly leveraged derivative instruments to Chilean retail investors via radio ads is a business that is not generally conducive to client success, as Bloomberg found out when they spoke with Loyola, who apparently did not have a good read on how Cisco, JPM, and Hewlett-Packard were likely to trade over the short-term: 

Amira Loyola, says she had no idea what she was getting into when, responding to a radio ad, she deposited 4.5 million pesos ($7,400) into a ForexChile account in 2011. She said her broker recommended CFDs linked to shares of Cisco Systems Inc., JPMorgan Chase & Co. and Hewlett-Packard Co…

 

Six months later, Loyola, a 52-year-old information technology specialist, was down 92 percent.. The underlying stocks had fallen by a third, but her leveraged investment had magnified the losses.

ForexChile certainly doesn’t constrain the Amira Loyolas of the world when it comes to what they can bet on. The company’s website features CFDs on currencies, shares, indices, commodities, and ETFs. To be sure, there are a lot of advantages to trading CFDs with ForexChile, including (but certainly not limited to): the ability to look at a price quote, the freedom to make your own uniformed decisions with no meddling from anyone who knows what they’re doing, the leeway to bet 100 times the amount of money you actually have instead of only 15 times, access to charts that aren’t outdated, and importantly, the ability to maximize your chances of failure by day trading.

From the company:

Advantages of Investing With CFD

 

“The investor can see the prices completely online.”

 

“As an investor, you are who manage your own money with just a click. You must not make or rely on third parties to enter or exit positions. Open your terminal determines the price at which you want to enter the market and then enter the operation. It's that simple.” 

 

“With ForexChile you can apalancarte up to 100 times your initial warranty. This means if you have $ 1,000,000 in your account, you could open a position of $ 100 million of the base currency, unlike other markets where leverage can be up to 15 times the initial amount deposited.”

 

“Additionally, allows to apply technical analysis studies such as Moving Averages, MACD, Bollinger Bands, RSI, ATR, etc. With these powerful features you can decide safer operation. In other markets the information is poor and outdated.”

 

“The vast majority of operations are performed as intraday. That is, as an investor you can open and close positions within minutes, as several hours or even days.”

If all of that isn’t enough to get you excited about trading CFDs in Chile, then you may want to check your pulse, but in the event a prospective client comes along and doesn’t think leveraged derivatives are the right choice, CEO Cristobal Forno has some advice: “If you want less risk, then put your money in a mutual fund.” And that may be the best advice because when asked by Bloomberg how many of ForexChile’s customers lose money, Forno estimated the figure was around 70%. 

*  *  *

The real punchline here is that Forno and ForexChile have actually asked, on several occasions apparently, to be regulated:

Cristobal Forno, the 33-year-old chief executive of ForexChile and one of its founders, says regulation would give investors more confidence. His firm, which employs about 180 people in Chile, has met with regulators multiple times to ask for oversight, he says.

In other words: the more legitimate we appear to be, the more people will hand us their money. 

 

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Fri, 03/13/2015 - 21:29 | 5887625 unrulian
unrulian's picture

sweet BTFD X100

Fri, 03/13/2015 - 22:07 | 5887701 one_hundred
one_hundred's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Fri, 03/13/2015 - 22:53 | 5887831 willwork4food
willwork4food's picture

I made almost 7K day trading when I was young & naive back when..too bad I didn't realize you could lose that much too... So Fuck off.

Sat, 03/14/2015 - 12:14 | 5888805 Exponere Mendaces
Exponere Mendaces's picture

Wow, I had no idea someone could gobble that much cock in a month. When they're swordfighting in your mouth, do you get extra?

 

LOLLERZ.

 

Sat, 03/14/2015 - 07:09 | 5888313 doctor10
doctor10's picture

Forno isn't getting the right somebodies their cut

Fri, 03/13/2015 - 21:29 | 5887627 A Lunatic
A Lunatic's picture

I'm glad the U.S. markets are regulated and fraud has been eliminated......

Sat, 03/14/2015 - 04:13 | 5888177 A Nanny Moose
A Nanny Moose's picture

Indeed. Whatever would we do without all those bought-and-paid-for bureaucraps?

"Unregulated" is a straw-man.

Fri, 03/13/2015 - 22:07 | 5887636 Yen Cross
Yen Cross's picture

What's the name of that CheeseBurger IPO?

 Shake Shack, Born in a Park, Is Going Public With Big Dreams - NYTimes.com   No Comment/

 

 Berkshire Hathaway > Lets go bottom feeding in Europe.

 
Berkshire Hathaway Sees Raising About 3 Billion Euros in Bond Sale - WSJ

 There's Lot's of confidence in Europe?

 This scenaro isn't unique... There's many more "private equity" & " shadow banking" entities playing this game.

Fri, 03/13/2015 - 21:36 | 5887641 Condition 1SQ
Condition 1SQ's picture

Really, why do we even bother regulating this shit?  If I want to trade in a less regulated market, all I have to do is look overseas.  I say let US equities, FX, etc markets run unregulated.  The corrupt markets will fail and the transparent ones will succeed.  People tend to not enjoy losing their asses.  Of course, that would require the government to relinquish power.  You'd have more luck squeezing blood out of a stone.  So the status quo will prevail .. the stock market will be propped up like the corpse from Weekend at Bernies .. a clothed sack of rotting flesh waving to the masses ..

Fri, 03/13/2015 - 22:32 | 5887785 toys for tits
toys for tits's picture

 

"Corrupt markets will fail."

 Are you having a laugh?

 HFT and spoofing has been corrupting all US markets for at least 6 years.

The only way this shit pile fails is when the dollar collapses.

Sat, 03/14/2015 - 00:00 | 5887949 Condition 1SQ
Condition 1SQ's picture

But if there were a plethora of alternatives, why would one put their money in a corrupt market?  Let competition sort out the scumbags from the angels.

Fri, 03/13/2015 - 21:44 | 5887657 the grateful un...
the grateful unemployed's picture

i would be interested in the winning trades, they  must be quite good

Fri, 03/13/2015 - 21:49 | 5887665 Seize Mars
Seize Mars's picture

Yeah, Bull. Shit. If Bloomberg is doing an "expose," it's because he didn't get a piece of the action.

Fri, 03/13/2015 - 21:59 | 5887688 permarig
permarig's picture

"particularly popular in the U.K., where the value of annual trading is estimated to exceed $900 billion"

Aren't these CFDs based on options? Aren't these actually come from only a handful of firms that posses the necessary infrastructure and these periphery bucket shops are just providing the entry into the casino?

Considering it has over $900 billion in volume in the UK alone, and certainly 60%+ who play with these are losing consistently, wouldn't this make a lucrative mafia casino business model? (Sounds easier than the oft mentioned heroin trafficking.)

If this much is involved, wouldn't this be a good 'raw material' for those algos working on order flows?
Wouldn't this result in the market being animated by this?

Considering a scenario in which the market has been ramped so high, that it's ridiculous, so the obvious choice for a gamble is to put on a few leveraged shorts, wouldn't it be in someone's financial interest to 'accidentally break the CBOE', which of course causes the markets to rise further these days, in order to not have to pay out those bets?

Fri, 03/13/2015 - 22:34 | 5887789 Yen Cross
Yen Cross's picture

 Does anyone know how to price June '16 calls?

 How do you price that decay? I want to short some TelCom Stocks {OTM}

Sat, 03/14/2015 - 08:19 | 5888370 konputa
konputa's picture

I can't help you there but I'm curious if you might share what you're planning to short?

 

Cheers.

Sat, 03/14/2015 - 11:05 | 5888659 IrrationalTrader
IrrationalTrader's picture

Simple... "We use a notion of stochastic time, here called volatility time, to show convexity of option prices in the underlying asset if the contract function is convex as well as continuity and monotonicity of the option price in the volatility. The volatility time is obtained as the almost surely unique stopping time solution to a random ordinary differential equation related to volatility. This enables us to write price processes, or processes modeled by local martingales, as Brownian motions with respect to volatility time. The results are shown under very weak assumptions and are of independent interest in the study of stochastic differential equations. Options on several underlying assets are also studied and we prove that if the volatility matrix is independent of time, then the option prices decay with time if the contract function is convex. However, the option prices are no longer necessarily convex in the underlying assets and the option prices do not necessarily decay with time, if a time-dependent volatility is allowed."

http://projecteuclid.org/euclid.aoap/1060202830

 

Fri, 03/13/2015 - 23:35 | 5887908 Karaio
Karaio's picture

Chile joined the "alliance of the Pacific" and fucked!

When the Empire fall, Chile, Paraguay (not so much), Colombia and Mexico are conscious of the shit they did to reject the like.

In Europe the paradox is Poland, Baltic countries, etc.

Who will see live.

hehe.

Fri, 03/13/2015 - 23:56 | 5887944 atomicwasted
atomicwasted's picture

The free market at work.  What's the problem?

Sat, 03/14/2015 - 17:13 | 5889486 Jaguar Zero
Jaguar Zero's picture

Sadly, it is true. A fool and his money soon go separate ways.
There are lots of those companies, they operate as both stockbrokers AND financial advisers and focused on intraday trades.
I don't know why it is just mentioned one of these companies (the infamous CMC markets is operating in Chile, too)

Sat, 03/14/2015 - 00:01 | 5887951 Kirk2NCC1701
Kirk2NCC1701's picture

Let's have Simon Black elaborate on this, as he's the ZH expert on everything Chile and how great it is.

"I don't think that capitalism should be unbridled, if by 'unbridled' you mean unregulated." - Chris Patten

Sat, 03/14/2015 - 00:03 | 5887955 gallistic
gallistic's picture

 

I wonder if this is why Michelle Bachelet was on the cryptic cover of  The Economist.

Sat, 03/14/2015 - 01:36 | 5888070 capitallosses
capitallosses's picture

I'm sticking with Texas chile. Almost worth moving there!

Sat, 03/14/2015 - 06:14 | 5888262 Heavy
Heavy's picture

I knew there were jobs somewhere...

Sat, 03/14/2015 - 06:55 | 5888298 buzzsaw99
buzzsaw99's picture

how the fuck stupid do you have to be to pick losing stocks in this market? just btfd holy shit lady.

Sat, 03/14/2015 - 08:02 | 5888354 Brokenarrow
Brokenarrow's picture

the banks have been playing the same game to pensioneers for twenty years under cover. bloomberg is a filthy ..............

Sat, 03/14/2015 - 11:02 | 5888632 IrrationalTrader
IrrationalTrader's picture

CFDs and Spread Betting (Capital Tax Gains Exempt) are both legal in the UK and regulated by the Financial Conduct Authority. Likewise leveraged instruments just like the ones mentioned in the article - Take a look at ig the biggest name in the market

Regulation won't make those instruments go away - But arguably they should have some oversight in their selling practices, internal oversight of staff piggy backing (or front running) client positions etc... 
And surely enough - Regulation will make the pain go away, just like the US right?  

Sat, 03/14/2015 - 14:51 | 5889144 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

it sucks that in order to get access to real markets in fx you neeed a shit ton of money.

 

retail brokers are bucket shops

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