The problem with crooks

I received an email from a member recently asking if the course offered by *********** is worth going to. They want $4500 for a two day course that says they’ll teach me how to trade and I am guaranteed to make money. Do I know them?

Yes, I know them and they are absolute shonks. They have been trawling this industry for years. What they are best at is manipulating Google so they always come up at the top. It’s a pity there isn’t a link between good SEO and quality. Google’s algorithm doesn’t filter for liars and cheats. But if you go to page 2 of the Google search you will find a litany of ex-customers trying to expose them for their reckless abuse of well-intentioned retiree investors.

The problem with crooks

The problem with the crooks in this industry is that when a business blossoms because naïve people lose money trading, they make a lot of money, which means they’re rich, which means that if I was to mention the company above in the newsletter (they are still active) I would have a lawyer knocking on my door tomorrow. They can afford them and because of that no one dares to cross them, including me.

I remember a decade or so ago going to an investment conference. The hotel hosting it had a habit of offering to valet park any expensive cars for free, which means they would leave them where they were, outside the front door. It made the hotel look flash.

This conference was aimed firmly at self-directed (mostly retiree) equity investors. On the third day there was a red Ferrari and bronze Aston Martin parked outside the front door of the hotel, visible to all from breakfast, and later that day inside the ballroom were two well-dressed 30-year-olds telling an audience of 400 people twice their age with exponentially more investment experience, how fabulous CFDs were, and how the forex market in particular was a golden fountain just waiting to pour its cash all over the audience.

For those of you wondering why everyone on this side of the industry makes such a fuss of the foreign exchange market, let me explain. If you make your money by facilitating other people’s trades (having them trade on your platform for instance) then the more they trade the more money you make. Whether that is through the spread, through commission, or through your platform taking the other side of the trade (their loss is your gain - like a bookie), the name of the game is the same. More trades = more profit.

The problem with equities is that the equity market is only open in Australia between 10am and 4pm and if a stock only trades once a minute say, there are only 360 trades a day. It’s really slow going in the equity market.

Forex on the other hand (trading in currencies) has multiple currencies trading multiple times every second 24-hours a day. If a currency only ticked (traded) once a second (popular currencies like the A$ trade much more than that) then there will be 86,400 trades a day. So if the number of trades is the game, getting other people dealing in foreign exchange is potentially 240x more profitable than persuading them to trade equities. Its like selling to China instead of Tasmania. There’s more money to be made in China.

Now do you understand why everybody wants you to trade Forex, why everybody tells you it’s easy, why it’s glamourised in advertisements showing young executives sitting in the back of limousines trading forex on their mobile phone, why they tell you you can do it and why they tell you it is easy. Because you might, just, believe them.

And now do you understand why a few years ago all the CFD platforms rotated from focusing on equities to plugging foreign exchange trading. Because equities are sooo boring by comparison.

I do know a guy who employed the husband of a friend of Emma’s to operate the night shift of his forex trading strategy. He paid quite handsomely. It worked. But to make it work someone had to sit there 24 hours a day and hit the buttons at the exact moments. It could not be automated. He described it as throwing heads and tails constantly with a tiny edge that only worked if you dealt big numbers over a long long period of time and had deep pockets to cover the drawdowns (losses) when they happened. It couldn’t be done in small size because you had to pay people to sit there, so there was a minimum size which meant a minimum (quite large) risk. He doesn’t do it anymore. A seismic moment in the currency markets wiped them and their jobs literally overnight. Its always the same with systems, it’s the once in a lifetime X-Factor not factored in that buggers up the theory.

Back to our Ferrari driving lecturer (the boss from Sydney) and his Aston Martin sidekick (who ran the local branch office).

I’ve always found it odd at these conferences that the youngest, most inexperienced people are always the ones telling everybody else what to do from the podium. This was no exception. At the end of their head set mic’ed stage walking slick talking exceedingly polished Wolf of Wall St ‘f@#k the client’ timeshare style sales spiel, a tired looking 80 year old retiree investor waddled up to the floor microphone for the Q&A. I’m not sure these guys knew there was a Q&A possibility. He cleared this throat.

“Are those your cars at the front of the hotel?” he said.

“They most certainly are” came the reply.

“Whose is the Ferrari?” said our retiree.

“That’s mine” said the Sydneysider.

“Can I have the keys?” said the man. “Because I’m one of your customers which means you are driving around in my Super Fund. The least you can do is let me have a go although I can’t guarantee I’m not going to wrap it round a f#@king tree for you. I don’t know who let you in here but I think I speak for everyone when I say, why don’t you f@#k off!”

Silence, a clap, clapping, applause, raptuous applause.

Want to know who they are? You can always tell a predator, they change the name of their business regularly. Burning brand name after brand name. Moving just fast enough for their outraged customer reviews not to catch up with the first page of the Google search. Follow the person not the business and when you find them, just make sure you read page two or three of their artfully honed interweb presence.

DISCLAIMER - I'm an equities guy, what would I know?

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Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.