ASIC today urged consumers to ensure they understand the risks of foreign exchange trading before putting their money on the line.
The warning about this complex investment comes after liquidators were appointed to GTL TradeUp Pty Ltd (GTL), a Sydney-based company involved in foreign exchange (FX or forex) trading. ASIC is investigating GTL and the circumstances around its collapse.
FX trading, which is becoming more accessible via electronic trading platforms, is when you buy and sell foreign currencies to try to make a profit. It involves speculating on the value of one currency compared to another.
It is normally conducted through ‘margin trading’, where a small collateral (property or asset) deposit worth a percentage of a total trade's value, is required to trade.
FX trading raises the stakes further by letting investors trade with borrowed money (leverage), but they are responsible for all losses, which may exceed their initial investment
‘Forex trading is complex and risky. Even the most skilled and experienced forex traders have difficulty predicting movements in currencies. Trading in international currencies requires a huge amount of knowledge, research and monitoring,’ ASIC Commissioner Greg Tanzer said.
‘Like any investment, it is vitally important investors fully understand what they are getting into, and FX trading is no different. Unless you fully understand what investment you are making and the risks involved with that investment, don’t do it.’
Further, ASIC has seen an increasing number of people setting up businesses that promote this type of investment strategy.
ASIC banned Robert Lloyd Wilson from providing financial services and have warned the public against dealing with him for his promotion of a program that showed ‘when to get in and when to get out’ of trades. These trades included, among other things, FX trades (refer: 13-282MR).
‘We will not hesitate to take action when we see people or businesses and their dodgy practices preying on innocent investors who may know little about these risky investments,’ Mr Tanzer said.
To successfully trade in FX, you will need to have good knowledge of foreign exchange, leverage, volatility, the conditions of each country whose currency you are trading, and counterparty risk – knowing where your funds will be kept and the risk that an issuer will default on its obligations to clients, including failing to return client money.
It is very risky because:
There are significant investment risks as currency fluctuations may move against you, causing you to lose money. Exchange rates are very volatile – they tend to move around a lot even within very short periods of time.
Markets are open 24 hours a day 6 days a week (due to time zones), so you need to devote a lot of time to tracking your investment.
Currency markets are extremely difficult to predict because so many factors affect exchange rates.
Even small market movements can have a big impact, because most forex trading products are highly leveraged.
Risk management systems, such as stop loss–orders, will only give you limited protection by capping your losses. You may have to pay a premium price to guarantee your stop loss order.
Further investor guidance is available on ASIC’s MoneySmart website.
The FX market is a network made up of banks, central banks, commercial companies, fund managers, non-bank foreign exchange brokers and retail investors. This means that there are no exchanges for FX trading as there are with listed products such as equities.
According to the Bank for International Settlements the average daily market activity in April 2013 increased to $5.3 trillion up from $4 trillion in 2010. The UK boasts the highest global turnover at 41% with the US accounting for 19%. Japan, Singapore and Hong Kong SAR each have turnover of around 5% while activity in Australia is just under 3%.