Professional investors would immediately be suspicious of anyone claiming even the lower-end of the monthly returns being promised by sellers of the various off-the-peg algorithmic FX trading systems now being banded about the web.
But this post earlier on FT Alphaville reminded us of a potent factor here: the gullibility potential associated with currency markets.
As a global marketplace that doesn’t exclude anyone due to the small values that can be traded, FX is awash with retail investors eager to make supposedly guaranteed returns. This is especially so in an investment environment where standard cash deposit returns have been cut to the bone.
Remember the damage Mrs Watanabe did with her carry-trade? Well, watch out for Mrs Robo-Jones.
But, while Mrs Watanabe was investing on a clean bet — borrowing cheaply to invest in higher-yielding currencies — Mrs Robo-Jones is dependent on internet-purchased algorithms to generate profits.
What currency trends this sort of behaviour might produce on a mass-scale, we have yet to see. What is certain — irrespective of how profitable the strategies actually are for Mrs RB — the trend is very profitable for FX platform providers. Accordingly, it’s unsurprising these companies are more than happy to encourage compatibility with their software, as the automated robots pump increasingly more trade through their systems.
But it’s not just the more obscure outfits that are peddling automated offers to retail investors. A number of more established foreign-exchange providers advertise either managed accounts based around returns garnered from automated-tools or their own automated algos for use on their platforms.
What, for example, can we possibly make of this – a piece of marketing guff from Switzerland’s Dukascopy, reputed to be one of the top “liquidity providers” around?
The Dukascopy (Suisse) SA trading strategy is based on an extensive knowledge of the Forex market, a privileged access to all market information along with a unique in-house built technology. This automated trading system has been developed by professional traders with experience drawn from institutional foreign exchange trading in close collaboration with some of the best financial IT specialists. The Dukascopy team has been able to design an automated strategy, capitalizing on its privileged access to the market information and on its leading technology. Dukascopy offers the DMA clients an opportunity to benefit from its ability to analyze and act a few milliseconds faster than other market participants.
“Privileged access to market information.” What???
The same firm pushes this graph under the noses of potential clients:
And here’s the performance from their now ‘closed to investors’ managed Dynamic strategy:
What we do know is that in the FX market, due to its over-the-counter status, many of the usual checks and balances we expect in – say – the equity markets just do not exist. Europe’s Mifid directive, for example, does not apply to the spot FX market at all, although in the US FINRA has clearly begun to poke around. As a recent report explains:
Most retail trading occurs online through electronic platforms provided by the dealer, who acts as counterparty to the retail customer’s trades and sets the execution price and the spread. The retail customer typically does not have pricing information and cannot determine whether the price quoted by the dealer is fair. Moreover, the dealer acts as counterparty and establishes the price, which means that the dealer has a conflict of interest in the transaction. Price comparisons are also complicated by different compensation structures: Some firms charge per-trade commissions, others impose wider spreads, and some do both. Other transaction costs can include account maintenance charges, software licensing fees and commissions paid to introducing brokers or other third-party service providers.
In the US, Congress last year passed an amendment to the Commodity Exchange Act to give the CFTC some oversight over the retail off-exchange foreign-currency market. Similarly, in Switzerland new rules require all foreign-exchange providers to be licensed financial institutions, with minimum liquidity holdings of CHF100m. Before that, providers operated under a self-regulated system via membership of the industry body ARIF (Association Romande des Intermediaries Financiers). But critics have argued that the body was focused more on money laundering than client protection.
Guaranteed returns…privileged access…conflicts of interest. Does anyone else sense that regulators might just be a little behind the curve here?
Related links:
Free money! Honest – FT Alphaville
High frequency trade in Europe – FT Alphaville
How and why the yen is suddenly the world’s strongest currency – FT Alphaville
Mrs Watanabe and the carry trade’s comeback – FT Alphaville