NEW YORK (AP) - Talk about falling trade barriers.
Speculating on foreign currencies used to be the privilege of giant banks and wealthy financiers like George Soros, who famously made $1 billion in a week betting against the British pound.
Now, it is within reach of the small-time private investor. Web sites have unlocked the world's 24-hour currency markets to anyone with a few thousand dollars -- a far cry from the million dollar minimum trades required by the big banks.
But financial experts say retail currency trading isn't a good idea for mom and pop. Besides attracting fraudsters, speculating can devastate the finances of an inexperienced investor.
``I advise most people to steer clear,'' said Bryan Lee, a financial planner in Plano, Texas. ``If you play a good game of blackjack your odds are better.''
Currency trading has followed the same trajectory as stock trading, albeit more slowly. In 1973, when gold-backed currencies were dropped for floating exchange rates, big banks handled trades via telephone.
In the mid-1990s, the system opened slightly, with banks creating electronic trading networks like FX Connect, which still catered to corporate clients trading money in massive lots.
``As an individual, if you had $10,000 and wanted to trade foreign exchange you couldn't do it,'' said Samantha Roady, marketing vice president at GAIN Capital, one of a handful of online trading ventures that cater to small investors. ``You either got turned away as a nuisance or you'd get a price that was so bad, it was almost impossible to make money.''
The emergence in the late 1990s of currency trading Web sites like GAIN and its competitors MG Financial, Hotspot FX and Britain's CMC Group, finally dealt the little guy into the game. They offer currency in smaller lots and freewheeling margins as high as 100-1, so that a $5,000 deposit can leverage $500,000 in foreign currency.
The tools available at trading sites look and feel much like those for trading stocks at E-Trade or DLJ Direct.
But currency speculation is quite different.
The currency market is many times larger than all the U.S. stock markets combined.
Foreign exchange activity is so prevalent -- $1.5 trillion changes hands every day -- that it can be imagined as a weather pattern of electronic cash flows, with major currents running between the United States and Western Europe and Japan.
Much of the money isn't bought and sold by speculators. Any company or individual that does business abroad -- even for simple things like owning stock in Nokia and other foreign companies -- is a party to a foreign currency trade.
Speculators bet on the economic outlook of an entire country, not a company. If a currency looks undervalued, they buy it. If it's overvalued, they sell. Variables are myriad. Profits and losses can be huge.
``There have been months when I made tons of money, and months that I've lost tons of money,'' said Chris Marsh, a 41-year-old Phoenix speculator who has traded currency on his home PC for three years.
Unlike stock investing, Lee and others point out that currency speculation is a zero-sum game.
``If I earn money on foreign exchange, that means someone else is losing it,'' said Robert Iati of the TowerGroup, a financial technology consultancy.
Problem is, most currency is traded by titanic players like Deutsche Bank, whose experienced traders prowl the markets with powerful computer models. Pit against them, financial analysts say the little guy stands little chance.
Besides that, scam artists have taken a shine to the business, setting up bogus operations that promise more than they deliver, said Daniel Nathan, deputy director of enforcement at the U.S. Commodity Futures Trading Commission.
In February, the CFTC charged 19 individuals and companies with making illegal foreign exchange offers. In 11 raids in the past two years, the CFTC says it halted schemes that bilked 1,000 traders of more than $60 million.
The CFTC has issued a series of warnings to consumers, asking them to check a company's credentials with the organization or the National Futures Association before investing.
Marsh is undaunted. The Phoenix trader said leverage margins offered by online currency trading houses give access to enormous amounts of capital, that, if used correctly, carry a far larger payoff than typical investments.
``There are more opportunities than you can shake a stick at,'' Marsh said. ``If you're a good stock trader, a good bond or commodities trader, you can make the crossover easily.''
Currency trading has been unfazed by the recessionary morass that has sunk stocks and bonds. Even in the days after Sept. 11, when stock markets were shuttered, currency trades rolled on.
Investors looking to diversify are starting to trade currencies, said Glenn Stevens, GAIN's managing director. The two-year-old start-up handles up to $2 billion in trades per week and counts customers in 40 countries who typically make 10 or 20 trades a day.
Betting on currencies isn't for the faint of heart. Even proponents advise newcomers to tread carefully.
``I certainly wouldn't advise this for my mother-in-law,'' said Dani Rodrik, an economist at Harvard University. ``This is an area where it's much harder for an individual investor to have a good nose for, than stocks or bonds.''
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On the Net:
National Futures Association: nfa.futures.org
Commodity Futures Trading Commission: cftc.gov
GAIN Capital: gaincapital.com |
