Retail forex brokers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at 25-50 billion daily, which is about 2% of the whole market. CNN also quotes an official of the National Futures Association “Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically.”
Standard retail services include 24-hour online currency trading, and 100-to-1 leverage. Most retail brokers do not provide direct access to the interbank market, acting as dealers (buying or selling against the customer’s order for their own account) rather than as true brokers (arranging a trade for the customer with a third party). The brokers earn money by offering a bid/offer spread that is wider than the interbank spread. Retail traders should be aware of the possibility of retail forex brokers manipulating quoted spot rates, improperly trigger their clients’ stop-loss orders or charge hidden fees.
According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) “Even people running the trading shops warn clients against trying to time the market. ‘If 15% of day traders are profitable,’ says Drew Niv, chief executive of FXCM, ‘I’d be surprised.’ ”
In the US, “it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity” according to the Commodity Futures Trading Commission. Legitimate retail brokers serving traders in the U.S. are most often registered with the CFTC as “futures commission merchants” (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker’s FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams.
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