Foreign currency trading online tricky, so do your research

Saturday, August 15, 2009

Are you being enticed to trade foreign currency online?
It's tempting — particularly since the U.S. dollar isn't worth much these days.
Foreign currency exchange rates represent the cost to exchange one country's currency for another country's currency. Right now, for example, the euro is worth a lot more than the U.S. dollar. But getting into this type of trading can prove risky. If you attempt it, do it with assets you can afford to lose.
Also, it's riddled with fraud.
There are significant differences between trading currencies and trading stocks.
For one thing, Larry Dyekman, spokesman for the National Futures Association, says there's no central clearinghouse for foreign exchange trading. It's all done on different trading systems via over-the-counter exchanges.
This can mean less regulation and possible conflicts of interest.
"You need to know if the firm you're doing business with is registered with the Commodity Futures Trading Commission and a member of the National Futures Association," he warns. Search data bases (www.nfa.futures.org and www.cftc.gov) for complaints and disciplinary actions.
Registration with those agencies may help you get some recourse if anything goes wrong. It also means the companies you invest with are at least audited.
Dyekman says there are 17 foreign exchange dealer members of his self-regulatory agency, funded by the industry.
Watch for "solicitors," or people who want you to do business with other foreign currency exchange firms. There may be no regulatory requirements covering them, Dyekman says.
So you had better determine with which company they're going to be trading your money, and research those.
Most of the problems with foreign exchange trading, according to Dyekman, involve promotional material and sales practice violations. "These firms are not being truthful in balancing the risk of losing money against the opportunity to earn money," he says. They might tell you you can earn 20 percent on your investment, but fail to balance that with the fact that it can lose money very quickly.
Some companies charge a per-trade commission. Others charge by widening the difference or "spread" between the bid and ask prices they give customers. Yet others charge both. So, if you take a stab at this type of investing, know how you will be charged.
Consider that you're competing with heavy hitters, such as banks and insurance companies. Trading systems could break down, and margin or leverage can expose you to greater risk.
"A system failure may result in the loss of orders or order priority," the Commodity Futures Trading Commission says.
If anything goes wrong it could be tough getting a refund. Many companies offering online trading are located outside the United States.
At least one heavy advertiser locally has been Forex.com, a division of GAIN Capital Group, Bedminster, N.J.
Last May, the Commodity Futures Trading Commission ordered Forex.com to pay David H. Ni more than $22,231. It cited a violation of a section of the Commodity Exchange Act dealing with willfully deceiving or cheating a customer. The National Futures Association reports that Forex.com's parent, GAIN Capital Group LLC, also was fined $100,000 for a June 2007 sales practice violation.
In the Ni case, GAIN Capital Group, in a statement, said it respectfully accepts the CFTC's decision, but maintains its firm conducted "no wrongful act or omission." A spokeswoman noted the older sales violation was minor, and GAIN Capital Group, in relation to much of the foreign exchange trading industry, has a clean record.