May 28, 1999
Individuals look For Quick Bucks
By Making Forex Trades Online
By MICHAEL J. CASEY
Dow Jones Newswires
NEW YORK -- Glancing at his computer at his Los Angeles home Wednesday morning, Randy Rice saw the Swiss franc falling in value against the dollar.
He noticed the euro wasn't moving with it and so felt pretty certain the move would be temporary. Sure enough, the Swiss franc soon began to rebound. Rice had his cue.
He hit a buy order on his online account with Midland Euro Exchange Inc. (www. midlandeuro.com), an Internet currency trading company based in Los Angeles, and rode the rebound. Rice then closed the position and got back to his regular job: running his tire distributorship.
"I made $120. Not bad for three minutes," he said.
Time To Quit The Day Job?
Mr. Rice is one of hundreds of small investors who've taught themselves the arcana of technical analysis and trading strategy to get a head start on what some say will be the next boom in online trading.
Ignoring warnings from federal and state regulators about the dangers of a market meant for big institutional investors, these people are using the Internet to tap into the fast-moving, non-stop world of foreign exchange.
Mr. Rice claims to make $4,000 a month on his $20,000 Midland Euro account. He closely follows technical charts and calls himself a "scalper -- a guy who goes in and out of the market and takes a few points here or there."
"The name of the game is taking profits," he said. "It's all part of the discipline."
Leveraged Trading Poses Big Loss Risks
In fact, discipline is crucial. At most sites, customer accounts are 100-times leveraged. That means if a currency moves just 1% in either direction, a customer's $1,000 investment in an open $100,000 position would either double or be wiped out.
To prevent sharp losses in the interbank market, professional traders use "stop-loss" techniques that automatically trigger position-squaring sales when a pre-determined maximum loss is breached. Getting small investors to learn such strategies is a task web sites have set for themselves -- many provide educational material and offer trial accounts with virtual cash balances.
In fact, these companies see educating the wider public as a means to growing their fledgling businesses.
Retail currency trading is "still an infantile market. .. Most Americans are ignorant of it," said Dennis Hannan, Midland Euro's director of operations and the man who aims to expand his company's customer base of 300.
"We're looking to be the Charles Schwab of forex," he said. Online stock brokerage Charles Schwab Corp. , serves 5.8 million investor accounts and manages $511 billion in customer assets.
Mr. Hannan's first target, though, is U.S. market leader Money Garden Financial Group Inc. (www.forex-mg.com), which currently boasts 1,000 customers and monthly executions of around $1.5 billion. This New York-based company is distinctly different from its California challenger, though, because it's a market-maker in its own right.
Money Garden spokesman Marc Prosser said his company trades directly in the cash market with counterparties in Chicago, allowing it to profit from the margin between the different bid and ask prices it quotes its customers. As such, the company can afford to waive trading commission charges for accounts larger than $10,000, even though its five-point bid-ask spread undercuts the 10-point gap offered in the interbank market, Mr. Prosser said.
Midland Euro and many other operators execute their trades through third-party clearing houses and instead make their money on commissions.
These differences in client-broker relationships are in part a function of the deregulated nature of the broader foreign-exchange market, something regulators and industry leaders alike warn can also lead to widespread fraud.
The lack of regulation is "a double-edged sword," said Midland Euro's Mr. Hannan. "You don't have the restrictions like other markets, but at the same time you have a lot of fraud, and it's giving reputable businesses a bad name."
Without a regulator, many of these "reputable" operators feel a need to distinguish themselves. That's why Money Garden seeks a high media profile and why it's taken out $3 million in fidelity bond insurance, Mr. Prosser said. The company also "strongly discourages" investors who don't pass due diligence suitability tests or whose "risk capital" -- defined by a rule of thumb as 10% of net financial assets -- is less than $10,000, he said.
Some Online Brokers Clear Own Trades
What some prospective customers looking at a number of different web sites mightn't realize, though -- unless they read the fine print in the contracts -- is that Money Garden is also the clearing house for these sites.
Mr. Prosser said his company executes trades on behalf of "slightly over five" different web sites. Although he declined to name the full list, he confirmed it included Tamb International Inc. (www.tamb-forex.com) and World Money Exchange Inc. (www.wme-fx.com). Both firms run separate web sites, but have the same mailing address and are in effect the same company, Mr. Prosser said.
A separate Georgia-based company, Opulent Trading Inc. (www.opulent-fx.com), also uses Money Garden for execution, according to Opulent's trading support officer Andre Rhone.
Because their sales efforts are separate, Money Garden says it has no involvement in the customer screening or the account insurance offered by these partner Web sites.
It's harder to get background details from a number of other sites.
One example is iForexNet Inc. (www.iforex.net).
Its site promises "high return and maximum excitement" from forex trading. Calls to a telephone number listed there went unanswered, but a request for information via e-mail was replied to by Victor Press, who the Web site names as iForexNet's chief executive. He said that due to changes in software and services, his company is "not ready for any publication." according to BAI Global Inc., a market-research firm in Tarrytown, N.Y.
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Write to Michael J. Casey at michael.j.casey@dowjones.com
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