FOREX Article

Discussion in 'Forex' started by TradeOff, May 1, 2004.

  1. For-ex, for all
    More small investors tap into currency trading


    By Rachel Koning, CBS.MarketWatch.com
    Last Update: 10:35 AM ET April 26, 2004

    CHICAGO (CBS.MW) -- Still stinging from near annihilation in the stock-market collapse, Marc Coppola went looking for an engaging investment alternative.

    CBS MARKETWATCH PERSONAL FINANCE

    The New York actor and disc jockey found one in the $1.5 trillion global-currency market and joined the fast-growing ranks of small investors trying to make money by trading money. After losing $750,000 in stocks based on others' recommendations, "now I've taken control," Coppola said.

    For as little as $250, Internet brokerages now give individuals access to a risky, 24-hour foreign-exchange market previously reserved for banks, hedge funds and corporate money managers.

    Lower entry costs, headline-grabbing dollar swings and tighter regulation of once fast-and-loose trading has drawn thousands of small investors into an around-the-clock market with a dollar volume often 30 times that of U.S. stocks. The National Futures Association says customer funds held by member foreign-exchange dealers and brokerages more than quadrupled in the two years ended Dec. 31. See related story on getting started trading currencies.

    Running with the pack

    Currency markets are not typically a buy-and-hold endeavor. Two or three days is considered long term, according to Mark Galant, chief executive and founder of Gain Capital, whose four-month-old Forex.com division caters to neophyte currency investors.

    But neither is it as frenzied as day-trading. Coppola notes that the global currency-trading day stretches well past the closing bell that capped adrenaline-pumping sessions for computer-tethered day traders of the late 1990s. There are lower-risk, even conservative ways, to play the currency market, he says.

    Still, Coppola devotes daily attention to this market since he began trading the greenback and its rivals around three months ago, even though the bulk of his positions are "long term" by currency-market standards -- a few days to a few weeks.

    Yet for many investors, the rush is the same as in the tech boom.

    The 24-hour access is appealing to many investors, said Samantha Roady, Gain Capital's vice president of marketing. Those with a particular interest in Asia and the lifestyle to support odd hours might, for instance, actively trade during that region's open-market hours and sleep during U.S. trading.

    Does that mean all investors have to choose between sleep and profit? No, say the experts.

    Caution horses

    Stop-loss provisions take on even more importance in currency trading than in stock trading and often involve multifaceted "if-then" scenarios. That way, market-moving blabbing by a finance minister on any continent doesn't have to catch a snoozing investor off guard.

    The heftiest volume in the 24-hour period is during the overlap of afternoon European trading and morning U.S. trading, Eastern time, said Joe Greene, a Short Hills, N.J., resident.

    Currency trading is more than a rush for Greene; it's his bread and butter. He's evolved from a full-time, at-home stock trader to a full-time currency trader, using HotSpotFX, another of the brokerages providing retail accounts, for about a year.

    He finds forex less volatile than stocks because it's a much deeper market. Currencies can be volatile, he admits, but they're not going to move in double-digit swings on earnings news, for instance, like stocks can.

    Still, currency trading isn't for everyone and tends to draw experienced stock or commodity investors, said Enis Mehmet, head of New York operations for London-based online brokerage CMC Group.

    This includes even the part-timers like Coppola, who in addition to his stock holdings has been buying and selling gold and silver for years.

    Volatility is irresistible to many investors because it often spells profit opportunity. It's possible for U.S. investors to gain (and lose) on both bearish and bullish dollar moves.

    Mehmet agrees that retail volume has increased in step with widespread media coverage of decades-low U.S. interest rates, global trade wars and terrorism fears, but he also credits investor desire to tackle a new market. See Currencies for the latest market developments.

    Galant says the volatility has made winners and losers.

    Like the months preceding the bursting of the tech-stock bubble, the foreign exchange market "had gotten too easy," he said. "As every doctor, lawyer and cab driver makes money, the market spanks you. People have suffered some pain."

    Left behind are the diligent investors. And there are still plenty of them, he argues.

    Greene and Coppola agree they're attracted by smaller minimum-account requirements than in traditional bank-to-bank currency trading, greater leverage than in stock investing, and mostly commission-free brokerage services. Narrower spreads - or price differences -- between bids and offers in currencies over stocks are also desirable to small investors.

    Instantaneous order fills thrill his customers, said Barry Calder, HotSpot FX's senior vice president and head of its retail division.

    Even the marketing has gone mainstream; Gain Capital is giving away a Mini Cooper automobile in a contest for new enrollees to its mini forex program.

    Tougher oversight

    Relatively complex and largely unregulated until 2000 save for self-policing, forex markets can carry hefty risk, the Commodity Futures Trading Commission warns. And, there continue to be dozens of brokerages operating outside the realm of the CFTC's oversight.

    About 20 active foreign-exchange dealers and brokerages are registered with the National Futures Association as a Futures Commission Merchant, which opens them up to the CFTC regulatory powers granted in legislation passed in 2000, according to NFA spokesman Larry Dyekman. Some of the firms provide trading platforms for both small-time and institutional investors, and some offer other futures products.

    The 20 firms reported a combined $42 million in customer funds at the beginning of 2002 and $225 million by the end of last year, a near 400 percent surge, according to figures provided by Dyekman.

    The swelling market is ripe for abuse.

    The CFTC has brought 58 actions against firms, impacting some 5,700 customers and $260 million in investments, since its new powers were awarded in 2000. Its actions produced repayment of $96 million in civil penalties and $60 million in restitution to investors. See the CFTC's warning on currency fraud.

    Outright fraud, in which investor money is never traded in the markets promised, is the most egregious of abuses, said Paul Hayeck, associate director in the CFTC's division of enforcement. But action may also be taken against firms who don't fully disclose fees, for instance, or who use illegal, off-exchange futures contracts.

    Galant, whose Gain Capital is one of the brokerages that chose to be under the CFTC's watch, said he'd like to see regulation go farther, He warns that investors who operate with non-FCM status brokerages do so at their own risk. Most of the FCMs are also FDIC insured, up to $100,000, for abuses such as employee forgery. The investment itself is not insured.

    Says Hayeck: "There are plenty of legal, regulated brokerages, and if there are complaints, [investors] know where they can come."

    Rachel Koning is a reporter for CBS.MarketWatch.com in Chicago.
     
  2. Good article, thanks for posting.
    c