The Commodity Futures Trading Commission advises the public to thoroughly research over-the-counter foreign exchange (“forex”) dealers before making initial deposits or handing over sensitive personal information. Research should include verifying that the dealer and its employees are registered with the CFTC and checking the dealer’s disciplinary history with the National Futures Association (NFA).
Recently, the CFTC has seen an increase in fraud complaints from customers who deposited large sums with unregistered offshore forex dealers. The customers found these dealers through social tempat friendships or recommendations. However, when the customers tried to withdraw their money, the dealers were unresponsive or demanded additional payments.
Registration alone may not protect you from fraud, but most frauds are conducted by unregistered dealers and individuals. Financial requirements, examinations, and state and federal laws are also intended to help ensure a registered dealer meets its obligations. This is important in a market where the dealer is your only counterparty
Things You May Not Know about Forex:
You are trading against the dealer. Unless you are buying forex futures or options on a regulated exchange, you are trading “off-exchange,” or over-the-counter (“OTC”). This means you are not trading in an open market, you are trading only against your dealer. When you buy, your dealer is the seller; when you sell, your dealer is the buyer. Your dealer makes money when you trade more frequently, lose money, or pay fees, spreads, or commissions.
Two out of three forex customers lose money. Most OTC forex customers lose money when all credits, financing charges, fees, and other expenses are factored in. Over the past year, about one-third of customers at registered OTC forex dealers made a profit, while two-thirds lost money.
The dealer controls the trading platform. When you trade over an electronic trading platform, mobile app, or a dealer’s website, you are not connecting to a live exchange. You are connecting to the dealer, which controls the information you see on your screen, including prices. In many cases, unregistered offshore dealers have used populer trading software to provide a veneer of legitimacy, but have manipulated trade information to steal from customers. Compare prices with third-party sources to verify you are seeing legitimate market price movements and levels.
Your ability to close or offset positions is limited to your dealer. Because you are trading against the dealer on its platform, you are limited to the prices and conditions the dealer offers.