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Chapter 11. Black Swans and Rogue Traders > Scams and Rogue Traders

Scams and Rogue Traders

For a short time in the mid-1990s, Forex became the dumping ground for failed equity brokers and scam artists. Individuals who were either suspended from trading stocks or could never get their series 7 quietly moved to Forex. It provided the ideal market. It was shrouded in myth, had high volatility, and was unregulated. In addition, brokers could easily ask for trading discretion (because the market was open 24 hours) and through high frequency trading generate huge commissions. Whereas in stocks they would have to make a new sale every time to generate revenue. The fundamental way to trade Forex is to move quickly in and out of trades, each time generating a commission for the broker (either as a straight commission or as part of the spread). What was considered churing in the stock market was normal trading in Forex. This means that $100,000 can become a money-generating machine with no regulatory protection afforded to the investor.

Although there have been a few spectacular scams, few are as sophisticated and dramatic as Evergreen International and First Equity (bogus clearing firms). If it had not been for the World Trade Center collapse, this sham might still be going on. According to the charges, two executives and three companies were engaged in mail and wire fraud, conspiracy, and money laundering that resulted in the loss of $100 million by about 1,400 investors in Australia, New Zealand, the U.S., and Europe.


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