The newest rush

The newest rush? Online currency trading.

Crain’s NY - Investment News; 5/22/2000;

Risky business makes pitch for rich investors

By Rosemarie Maldonado

Day trading in the volatile stock market too dull? Returns too anemic? Try currency trading for a real adrenalin rush and a chance to make real money.

That's basically the pitch being made to jaded day traders in advertisements from online currency trading sites that say they offer a bigger bang for the buck.

"We have seen a lot of advertising on television that suggests foreign exchange trading is a quick and easy way to a big house and lots of attractive-looking friends. It's very risky business," says Marc Beauchamp, executive director of the North American Securities Administrators Association in Washington.

But so far, financial planners are unconcerned. Currency trading, they suspect, will appeal to very few clients or prospects.

Those sponsoring the online sites disagree. They say sites are sprouting like weeds in a wet spring.

Gain Capital, an online currency market maker, plans to go live this week. The firm, just under a year old, intends to haul in the smaller institutional customers they say large banks have ignored.

"Those who have been able to cater to the small-deal side haven't been able to put up the professional infrastructure from a funding, technology and management point of view," says Glenn Stevens, head of sales and trading at the Warren, N.J., company.

Gain Capital is also looking to attract business from small hedge funds, commodities traders, and professional foreign exchange and equity day traders.

In response to the spurt of online currency sites in the past year, Deutsche Bank AG and Chase Manhattan Corp. have joined the ranks of firms selling currencies to their corporate customers over the Internet.

Mark Galant, chief executive and founder of Gain Capital, says other online currency trading sites pose no threat to his company. He cites banks as his competition because they have brand name recognition. "We are trying to go after the customer the banks have neglected since the history of foreign exchange trading," he says.

The hunt for experienced high-net-worth traders may put online currency trading sites in stiff competition for customers.

They must also overcome an unsavory reputation caused by flyby-night firms that promise high returns while understating the complexity of currency trading.

"We have done everything possible to lend legitimacy to what we are trying to accomplish. We are fighting against the likes of these less-than-scrupulous bucket shops," says Josh Levy, director at the New York based currency broker Matchbook FX.

AVOID SCREWING AROUND

Seductive advertisements will not win over their clients, financial advisers say. Day trading remains the only threat to the business financial planners rely upon.

"I don't know of a lot of people who screw around with currencies," says Christopher J. Tuttle, a certified financial planner at Northwestern Mutual/Baird Securities in New York. "Most people will admit it is a little too far afield for them."

Gregory Olsen, a Financial Planning Association board member, says his business will remain unscathed. "That wouldn't affect me in the least. This is not something that is going to affect 99.9% of financial planners-- not in a million years," says Mr. Olsen, a planner with Cowan Financial Group in New York.

The move by companies like Matchbook FX to eliminate the middleman may give them the edge they need to compete.

EXECUTION EXPLOITATION

The elimination of the middleman can be significant. Passive traders can be charged $5 when a bid is accepted, and aggressive traders can expect a $15 fee.

"Traders are tired of being taken advantage of and exploited every time they try to execute a deal," says Mr. Levy. "They know they are paying 4 to 10 basis points too high every time they try to buy They are selling 5 to 10 bps too low. They know it costs them money."

In a move to attract more customers, brokers like MG Financial and Matchbook FX also offer models that allow traders to post bids and offers directly to the trading screen.

The screening of potential investors is a must as well, says Dixon Fung, a board member at NewYork based MG Financial. "We don't want people to use rent or pension money to trade," he says.

Currency markets are unregulated, making it easier for frauds to occur. "The people promoting these scams are not trading on the exchanges. They are taking advantage of a regulatory loophole. Wherever regulators aren't, the crooks are," says Mr. Beauchamp of the state securities regulators group.

Companies like Matchbook FX have taken steps to avert fraud by registering with NetCheck, an online financial self-regulatory organization.

"At least seven out of 10 day traders lose money. Day trading itself is risky, if you marry it with currency you can draw your own conclusion," adds Mr. Beauchamp.