Currency trading is a vast and technical space, however, many get caught in the seductive web of quick gains. Untangling forex can be daunting but with patience, it can be rewarding.
Foreign exchange, also known as forex (FX), is a trade that has risen in popularity over the last decade on the continent. Many companies and sole proprietors have claimed to have amassed wealth from FX, going as far as offering seminars and flaunting their opulence on online platforms.
However, a number of them have also been exposed as frauds and scammers. This has called into question the validity of FX as a credible investment vehicle, but the semblance of wealth has also continued to attract unsuspecting investors.
Simply put, FX is the market where foreign currencies are traded. It is a vast and mercurial space as currencies from all over the globe participate in this market. The buying and selling of currencies in this decentralized global market is determined by whether markets move up or down and traders make decisions based on these movements.
These market conditions influence how traders speculate and make predictions, with the ultimate goal of selling a currency at a higher price than it was purchased for in order to make a profit.
FORBES AFRICA followed the breadcrumbs of an unsettling FX story that has since uncovered a police investigation into a shocking FX scam that spans provinces and allegedly defrauded millions from unsuspecting investors. How easy is it to pose as a forex trader? What steps do investors need to take to ensure their money is the hands of reputable traders?
Forex landscape in Africa
In relation to other markets, the popularity of FX in Africa is relatively new. The first retail forex CFD (contract for difference) on the continent opened its doors in 2017 in Sandton, dubbed the richest square mile in Africa.
This is an indicator that FX had not been previously commercialized on the continent, while globally FX lounges were commonplace. This speaks to the idea that FX is still developing in Africa. It is also an indicator that Africans have shown enough interest in FX for investors to identify a gap in the market and take the risk of trying what others have not previously ventured towards.
Although it has provided investors the golden opportunity of an uncharted territory, it has also created a feeding frenzy for predators looking to exploit a decentralized market that produces an average value of $5 trillion daily trading volume globally.
FX trading occurs digitally, via the internet which is an immeasurably colossal space, with crevices like the deep web that elude the average Googler. Its boundlessness means that it does not fall under any particular jurisdiction and, therefore is not restricted by laws and regulations.
Herein lays the first of many obstacles for an unsuspecting investor who hands money over to scammers. Technically, anybody can trade should they choose to do so and this opens the door for reputable traders and shysters alike.
Economist Kathy Nicolaou Manias cautions that “scamming in the digital space is very intense… it’s actually very easy to be scammed but you’ve got to keep your wits about you and be very careful.
“The forex environment is an incredibly volatile one, especially if you’re looking at the rand. It’s different if you’re looking for a retail trader – that’s someone who is an agent who can convert currency for you,” says Manias who is a leading expert on the continent on illicit financial flows, AML/CFT, beneficial ownership and trade-based money laundering.
There has been increasing evidence to show that a significant number of people who invest in FX have a limited understanding of what it entails and inadvertently end up being victims of unscrupulous traders, trainers, brokers, and companies.
The draw to the FX market is that it’s purported to be a space of opulence and lightning-quick extraordinary returns for relatively little work.
Nick Sproule, who is a retail trader and director of Blackstone Futures – which is a forex and CFD company, says his clients are “mom-and-pop clients who are interested in being involved in the financial markets”.
He agrees it’s possible to make large sums of money but says there are a variety of distorted associations with FX.
“You can make excessive profits in a short space of time, based on the amount of capital that you put in… There are a lot of people out there that purport themselves to be mentors, trainers, FX experts that who lure people in with this idea of big wads of cash and create the idea that it’s achievable for everybody.
Typically, there’s a training program that comes with it; they offer free signals, and the reality is that most of these mentors or trainers can’t trade themselves.
“They make money charging R20,000 ($1,415) for a course, people part with their money and before you know it, they haven’t learned anything and the mentor has disappeared.”
Manias echoes Sproule’s sentiments in saying there might be a burst of financial incentives from trading but it’s inconsistent and therefore it’s erroneous for traders to perpetuate the idea that FX offers a limitless amount or wealth daily.
“The rand is probably one of the most volatile exchange rates globally. It’s a very small, open economy …so that can promise you ridiculous things in a short space of time but over the long term, that can be very unsustainable,” Manias says.
Those interested in trading are not at the complete mercy of shysters. The South African Reserve Bank (SARB) enforces the exchange control legislation.
These “controls are most commonly imposed because of concerns about outward flows, but controls can also be imposed to restrict inward flows, for e.g. an influx of funds risks damaging an economy,” SARB reports on its site.
Despite vigilant monitoring, insalubrious practices by false traders can, at times, go unnoticed because scams often include scenarios where the victims voluntarily offer their money or personal information.
“South Africa’s reserve bank has probably got one of the most sophisticated foreign exchanges, particularly for a developing country. That forex surveillance office functions incredibly well and it’s got a very good handle on how it manages forex in the market,” says Manias.
According to reports, the dollar is the most traded currency globally, taking up 84.9% of all transactions. The euro is second at 39.1%, while the yen is third at 19.0%.
On the continent, the only local currency ranked among the most-traded in the international FX market, is the South African rand, which was placed at the end of the top 20 in 2017 – accounting for 1% of the world’s daily currency trading, according to a survey by the Bank for International Settlements.
Also, in the last three years, the rand has strengthened by almost 6.3% against the dollar since December 2015 – making it the strongest currency against the dollar in this period, according to data published in December 2018 by independent analyst Johann Biermann.
As much as this bodes well for the economy, it is an indicator that the rand is fluid/volatile. Fluidity reflects that the rand is highly malleable and is often affected by external conditions.
“The rand is too volatile. Today, it’s up 10 cents, then tomorrow, something silly happens; we have a Bosasa scandal and the next thing you know, the rand plummets again,” Manias laughs.
How can this fluidity be used to the advantage of those involved in currency?
In 2017, South Africa’s Competition Commission filed an affidavit stating that more than a dozen banks were illegally profiting from the rand’s volatility.
A total of 17 banks were implicated, three of them were South African banks.
Sproule says that those who can manipulate currencies do so because as conglomerates, they dominate the environment.
“There are only a handful of big market players, these are the banks that set the prices for the rand–the big banks.
“Because the rand is controlled by a couple of big players, it is much easier for them to move the market much faster. You only have to look at the fact that there will be announcements on policies that come out, and before that, the rand has already moved quite significantly.
“I think it’s easier to move because it’s controlled by a handful of people who have good access to information that we wouldn’t necessarily have access to,” Sproule says.
Manias acknowledges that there are instances where banks might exchange information, however, as part of common business practices that many partake in.
“From a competition perspective, you can understand that if they [banks] are colluding to manipulate the exchange rate, they are driving the price up or down,” she says.
“Institutions would do things like that. Whether it’s done nefariously or with the intention of proven business practices – it’s difficult to prove.
“In the early ’90s, George Soros and his son collapsed the rand… If you have enough capital backing, you can easily do that. And South Africa is a small open economy, so it’s really vulnerable to that kind of volatility. (Cont)
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