The financial world’s attention may be on the high frequency trading programmes employed by numerous banks and hedge funds. But there is another story…
Algorithmic trading, by eliminating the human touch, presents an uncomfortably tempting proposition to the retail investor. One area where this is clearly becoming evident is in the loosely regulated spot foreign exchange market. Scores and scores of products claiming to have the ability to make you money while you sleep, with no need for financial knowledge at all, are hitting the marketplace.
Dubbed “forex robots”, or FX-bots, they’re mainly promoted via the internet, Youtube, forums or FX platforms themselves. A quick perusal of the web shows you can pick up one of these “forex machines” for about $140 or so. Returns of as much as 100 per cent a month can be promised, alongside the laughable claims of “no losses ever”.
How does it work? Well, most of the time you download the required software to your computer and, providing you have an account with a compatible broker platform, you’re up and away. You allocate funds and the forex robot executes alleged “money-making” trades on your behalf. Here, for example, are the workings of one of these products via a US patent:
[0004]According to one embodiment, a method of distributing trading signals is provided. The method includes server-side software which receives trade signals from an automated or manual trading strategy. These signals and related trade information are stored in a database that is accessible from the internet or other network. The method also includes client-side software that reads the signals and trade information from the database over the internet or other network.
Illustrating the rampant growth in such FX-bots, here’s a relevant graph from the US patent office (click to enlarge):
Of course, there’s nothing wrong with providing ordinary investors with an algorithmic tool programmed around a technical analysis strategy. The problem is making outrageous claims like the ones in this video, often with no warning about potential losses.
Not all of them make such heroic promises, but most lead the user to believe that they can somehow emulate professional forex traders. A typical projection is for returns of 4 per cent – per month – which any real life FX professional will tell you is impossible without taking extreme risks.
At least FINRA, the self-regulatory Financial Industry Regulatory Authority in the US, is on the case. In March 2009, they wrote:
FINRA has also seen an increase in membership applications from firms interested in conducting retail foreign currency exchange (forex) business and an increase in retail forex activities among current FINRA firms. Retail forex is particularly risky for individual investors, and it has generated problems from abusive sales practices to the financial failure of retail forex merchants. As discussed in Regulatory Notice 08-66 (www.finra.org/notices/08-66), FINRA
There should be no surprise that internet investment forums are littered with tales of hapless punters shelling out good money and failing to see any return at all.
As with all get-rich schemes, one question is never answered: if the system is that good, why doesn’t the promoter simply get rich using it themselves.
Related links:
High frequency trade in Europe – FT Alphaville
How and why the yen is suddenly the world’s strongest currency – FT Alphaville