The Flipside To Rigged FX Markets: "The Most Consistent Thing Is Losing"

As today's latest example of pervasive, apparently endless criminality at the world's largest banks, where once again the shocked public is exposed to a culture of sociopathic, unchecked greed and perpetual raping of clients, showed, one is either part of the all too literal "cartel", or one loses money.

However, for those who are unfamiliar with the nuances of FX trading, one doesn't even have to be on the other side of the world's most criminal, above the law, cartel of bankers to have no P and only L: the fundamental premise of currency trading, whereby one can and will be stopped out thanks to leverage as high as 50x - by others but mostly by one's own brokers as we learned today courtesy of JPM, Citi, RBS, HSBC and UBS - is the very same reason why as retail FX trader Dan Gratton, a 71-year-old retiree who lives on Social Security in Kingman, Arizona has found out: "Probably the most consistent thing is losing."

He is referring to FX trading, adding that he’s been a student of the the Market Traders Institute Inc., the oldest and largest currency trading "school" for two years and had hoped that taking its home-study classes and watching webinars would help him succeed with forex trading. Not only has that not happened, but Dan has lost tons of money in his pursuit to get rich quick, thanks to the same leverage that allows him to dream of big paydays just around the corner.

But at least Dan spending for "class" upon "class" in hopes of honing his FX trading skills, has made the owner of the Market Traders Institute, shown below, insanely wealthy and with lots of credibility-building computer screens.

Jared Martinez, CEO of Market Traders Institute, combs his hair as he prepares
to teach an all-day forex-trading seminar at MTI's school in Lake Mary, Florida

As Bloomberg reports, most retail currency investors lose money most of the time, according to the industry’s own data. Reports to clients by the two biggest publicly traded over-the-counter forex companies -- FXCM Inc. (FXCM) and Gain Capital Holdings Inc. -- show that, on average, 68 percent of investors had a net loss from trading in each of the past four quarters. These kinds of losses make for investor churn.

“Given the highly volatile nature of the forex and futures markets, the substantial risk of loss and the possibility that a total loss may occur in a very short period of time, the Board has concluded that Members should be prohibited from permitting customers to use credit cards,” the NFA wrote.

In the same letter, the NFA noted that 72 percent of U.S. retail forex traders suffered a net loss in the fourth quarter of 2013.

Martinez, the Market Traders Institute CEO, tells students the odds of losing in forex trades are even worse. But therein, he says, lies an opportunity.

Ninety percent of all novice traders fail,” he says during MTI’s March webinar. “This is a zero-sum game, like playing poker, where the losers pay the winners,” he adds, speaking softly, patiently. “If you can land within this 10 percent, don’t you think you can make a lot of money trading forex?”

You can, but anyone who knows a bit of statistics knows that you won't. Of course, this never stopped the get rich quick addicts from burning their disposable income on money-losing tickets to wealth in the form of lottery tickets.

Alas, when it comes to retail FX traders, that's when the pain only begins. More from Bloomberg on this final "get rich quick" frontier:

The average OTC forex investor drops out of the market after just four months, according to the National Futures Association, an industry self-regulatory group.


Retail forex investors, many of whom are well educated in fields other than finance, enter into a market that is lightly regulated, opaque and rife with conflicts of interest. They are enticed by pitches from coaches like Martinez, saying people can finance their retirements trading forex.

The reason why most retail investors are quickly chewed out and spat out is very simple: unlike the TBTF banks who have virtually unlimited balance sheets, retail investors have quite limited amounts of cash. Add 50x leverage or 2% equity, and the smallest move against one's positions means an immediate margin call.

[They] are allowed to supercharge their bets with the kind of leverage -- as much as 50:1 -- that investors in other asset classes can only dream of. That kind of juice can lead to wins, but more often than not, it leads to big losses. Investors can have their entire investment wiped out in a matter of days.


* * *


The great lure of forex trading has less to do with the movement of the currencies themselves and more to do with leverage. Using leverage of 50:1, an investor can amp up a $100 wager so it can pack the punch of a $5,000 bet. That means traders can double their investment on a 2 percent currency move in their favor. 


“Would everyone want to take a $20 bill out of your wallet and magically turn it into $1,000?” Tormos asks in the March webinar. “Imagine if you took $2,000 from your bank account and traded it in the forex market. It would be worth $100,000 of buying power.” The elixir of leverage makes it possible to score big gains even in a market that often rises and falls in tiny increments, calibrated in fractions of cents.


“Currencies don’t move that much,” says Drew Niv, chief executive officer of FXCM, the largest OTC forex firm in the U.S. “So if you have no leverage, nobody would trade.”


While leverage can boost gains, it can also magnify losses.

“Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains,” FXCM’s website says. With 50:1 leverage on a currency trade, a 2 percent move against the investor would mean a 100 percent loss.


That’s what could have happened to a trader using 50:1 leverage to bet on a rise in the Japanese yen on Oct. 31, when the currency fell 2.8 percent against the U.S. dollar in one day. In September, the euro lost 2.07 percent compared with the dollar in three days.

Is it starting to become clear why one needs to be part of a criminal cartel to assure profits? Not yet? It will:

Forex trading is like gambling at a casino because the odds are always stacked against you, says Michael Greenberger, who was director of the Division of Trading and Markets at the Commodity Futures Trading Commission from 1997 to 1999.


“People are lured into forex trading the same way they’re attracted to a roulette table,” Greenberger says. “It’s a no-win proposition.”


Most people who trade currencies don’t do it on an exchange; they trade over the counter, usually online, using a broker. But currency brokers aren’t neutral parties; they’re also buyers and sellers, sometimes taking the opposite sides of their customers’ trades.


That’s how brokers can be in conflict with their own clients -- a disclosure brokers are required to make to clients in writing by the CFTC, which regulates forex trading. Brokers may offer any currency prices they wish and can give different rates to various customers at any time, the CFTC-required disclosure says.

So back to leverage:

“Leverage is wonderful if you win, but it kills you if you lose,” says Greenberger, the former CFTC regulator, who’s now a professor at the University of Maryland’s Francis King Carey School of Law. “It’s a selling tool to convince the customer how great retail forex is.”


* * *


Because OTC trading isn’t done on an exchange, the forex broker becomes the client’s counterparty, taking the other side of the transaction. If an investor wagers the yen will rise, the broker bets it will fall.


Sometimes the broker keeps the trade on its own books, sometimes it matches the trade with that of another customer who’s speculating in the opposite direction, and sometimes the broker lays off risk by hedging with a bank.


The CFTC, which refers to brokers as dealers, requires them to tell clients in disclosures, all in capital letters: “YOUR DEALER IS YOUR TRADING PARTNER, WHICH IS A DIRECT CONFLICT OF INTEREST. WHEN YOU SELL, THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER.”

With OTC trading is still no man's land, meaning FX is exempt from regulation since the 1970s, the original criminal syndicate are the good old bucket shops made popular in such movies as Boiler Room and the Wolf of Wall Street:

That was intended to smooth currency transactions between banks, which had their own regulators. But it created the opening for OTC forex trading. With no agencies minding the store, bucket shops and con artists pitched forex trading to naive investors, FXCM’s Niv says.


“In the late ’90s, the FX business was 100 percent made up of boiler rooms,” he says.

Funny, because it is the same now. Only the criminals are now called "reputable banks."

So with a rigged casino and 50x leverage what is one to do? Clearly the logical one is to stay away from such a broken, manipulated market:

Leverage has blown out a lot of OTC forex traders. So have broker conflicts, enticing pitches, practice accounts, credit card debts -- and taking risks in a market dominated by professionals that may not be suitable for amateurs.


Former CFTC official Greenberger says the only way to fix the market is to shut it down. “There’s no good reason to allow it,” he says. “The way to get at it is to ban it.”


The closest the CFTC has come to doing that is requiring forex brokers to give clients dire risk warnings. Even with those, no matter how large the disclosures about leverage and conflicts are written, millions of people take the OTC forex plunge every year.


“A myth is that people think that they’re going to be insanely wealthy, guaranteed,” Niv says. “They understand that they’re unlikely to, but they think they could.”

Ironic then, because with 6 years of Fed, and ECB, and BOE, and SNB, and BOJ interventions, that is what equity market participants think too. And much to the chagrin of said participants, just like "investors" in Madoff's ponzi scheme, there will be no calls to ban that particular fraud until everything crashes one final time.