Regulator issues foreign exchange trading warning

(April 15, 2004) Ontario’s securities regulator is warning inexperienced investors about the risks of currency and foreign exchange trading and says ads promoting such trading might be fraudulent.

In an alert released today, the Ontario Securities Commission (OSC) says currency and foreign exchange trading — also known as FX or Forex trading — is dominated by large international banks with trained staff, advanced technology and million-dollar accounts.

“You can take a course, you can buy some software, but you’re swimming with sharks,” says the OSC’s Perry Quinton.

The rise of the Canadian dollar has led to a renewed interest in currency trading, Quinton says. “We’ve definitely seen it resurface lately. It’s been around for a long time but we’ve seen an increase in newspaper ads, articles and infomercials.”

“You have to be very careful when you get into this kind of trading,” Quinton explains. “There are certainly some legitimate operations out there — currency trading is a big business. There is potential to take some profit, but it’s risky and that’s what we want to bring to the forefront.”

Foreign exchange commodity transactions, like derivatives, are classified as securities, she points out, “So you should be dealing with someone who is registered.”

What’s even more risky is dabbling in the currency exchange spot market, Quinton adds. “That’s essentially cash and those people don’t need to be registered. That’s really an unregulated part of the market. You have to be very careful because you don’t necessarily know where your money is going.”

In a typical case seen by the commission’s enforcement branch, an investor will open a spot trading account by sending a cheque to a post office box. The investor will receive trading statements, but will be stonewalled when they try to withdraw the cash.

“They’ll be told that the currency they were trading in has taken a dive so there’s no money left in the account,” says Quinton. “People can end up losing a lot of money and it’s dubious as to whether the trade actually takes place.”

The OSC has received complaints about currency trading ads, but Quinton wouldn’t say how many.

Check the fine print in the ads and investigate the firm offering the product, the regulator advises.

“In reality, the only people guaranteed to make money are the people selling the software or offering the seminars,” the commission says. “Not even the experts can consistently predict what the market is going to do — these programs won’t either.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com