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The Reformed Broker

Inside the boiler room of currency trading

The average person who attempts to make money from trading currencies will likely be taken advantage of

By Joshua M. BrownGuest blogger / April 11, 2011

Electrician Danny Harris looks around the boiler room of the Gage, an attack transport ship that took Marines across the Pacific Ocean and landed them on Okinawa during World War II, in this August 5, 2003 file photo. Online currency trading firms work much like old-school boiler room brokerages, writes guest blogger Joshua M. Brown.

Bill Tiernan/KRT/Newscom/File

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The online currency trading shops are modern-day boiler rooms.

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I have absolutely no interest in mincing words or playing politics with this post. I am exercising my First Amendment rights and I intend to speak plainly.

I have been warning people for some time now that the average person shouldn't be attempting to trade currencies and that Forex is not an "asset class" for individual investors. After reading Andrew Bary's piece this weekend in Barron's I've never been more certan that I am right.

I am not arguing that making money trading currencies is impossible, I am saying that most people who try are merely being taken advantage of.

Let's skip the opinions and go straight to the facts:

  • Three quarters of people who trade with online currency firms lose money. 75%. That data comes from the firms themselves as they must now report this information to the CFTC.
  • Forex firms are seeing client attrition rates of between 15-25% a year versus only 5% from traditional online stock brokerages.
  • Retail players are trading through brokerages whose very business model is to act as a counterparty to them. Yet the marketing is predominantly of a "let us help you diversify into currencies" nature. Nice.
  • Industry-standard leverage levels, down from 100-to-1 to a still-absurd 50-to-1 automatically disqualify Forex as an "asset class" for investors. The more suitable categorization for this activity is gambling; it is more akin to OTB or the casino than to stocks and bonds.

The old-school boiler room brokerages operated in the exact same manner as the modern online currency firms do today.

The house was selling its own product (shady stocks) to the customers who eventually lost everything. The customers were transacting with an "inside market", in which the buying and selling was almost completely controlled by the brokerage itself. New customers were constantly needed to replace those whose accounts were wiped out.

Once the customers were used and abused, aggressive telephone sales tactics were the only way to replace them. Forex firms are doing this with banner ads and SEO rather than with guys from Staten Island coldcalling. The big online Forex firms are using "game mechanics" to keep the suckers coming. They are also sponsoring television shows designed to make people feel as though they are supposed to be fucking around with currency trading.

The method of bringing in the "customers" may be different but the purpose is the same.

These are boiler rooms.

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