Is it investing… or gambling?
2009/07/24 3 Comments
Tougher to get involved in →
Have you heard of ‘Mrs. Watanabe Syndrome’ in Japan?
The name, Watanabe, is the most common last name in Japan; somewhat like Mrs. Smith in the U.S. or Mrs. Kim in Korea. And the phrase refers to a syndrome of ordinary people getting into a lot of trouble by investing in extremely risky investment activities. The trend is spreading to Korea, and the government is out to put a stop to it.
So, what is it all about?
It’s not about FedEx, or FX Channel. It’s about the FX (Foreign Exchange) margin trading system. This FX trading is very attractive, while at the same time, it is very dangerous system too. Let’s have a look at why it is attractive and why also it is so dangerous.
FX margin trading has become very popular ever since its conditions have become loosened to invest in the fluctuating currencies of other countries with only a small deposit. In what countries? Especially in Japan and United States… and recently also booming in Korea
FX is attractive because using just a small amount of money, if you predict the future foreign exchange data right, you could potentially earn a lot of money!
Are you saying that you are familiar with this phrase?
Yes, it does resemble gambling quite a bit.
Shhhh…but it is not gambling. It is a bit diffffffferent~
For the people who like data, here is some information.
Since 2007, FX trading transactions volume has increased tremendously up to almost 6 times and the volume of transactions for the first five months of this year already exceeded 85% of all transactions in 2008. Most of which, 92% to be exact, are traded by retail investors.
Yes, we can see that it’s really a huge amount and it is a remarkable figure. But that’s not the point here. So can we really earn money from this?
To prove otherwise, here comes the data again.
<Gains and Loss from FX Margin Trading chart>
Yes, we can see a lot of minus. So it is more losses than gains. The losses reached a surprising amount of KRW 11.8 billion in 2007 to KRW 48.9 billion in 2008 and KRW 44.9 billion as of May 2009. Isn’t it a huge amount? What is more, most of the losses are being made by the vast majority of retail investors as short-term investments because they don’t have enough information in cross currency fluctuations.
But that’s not the end. Because of the loose system and enormous allurement and risk, related crimes are occurring more and more. Unauthorized intermediation and direct transaction is one thing, while unlawful solicitation of investors is another, followed by unauthorized training programs. Given that tremendous losses are being occurred to ordinary people, there should be something done about it.
Therefore, in order to solve this problem and prevent ordinary people from getting involved in such high risk investing, Korea’s financial regulator, the FSC has decided to strengthen the regulation on FX margin trades.
In what way?
First, margin requirement has been raised to 5% from 2%. It means that in the past if you had 100 won you could have invested as if you were investing 5000 won. But now the leverage effect shrinks to 20 rather than 50 so that the reward of falling in to the high-risk temptation becomes smaller.
We know now that FX trading caused individuals investors huge losses. But on the other side, who might have been benefiting from the trades? I’m afraid it’s only the intermediaries.
Because the usage of FX margin trades in the first place was for big institutional investors , it is far too difficult for small investors to profit through the system. Predicting foreign exchange movement can be rarely done by ordinary investors and even a small amount of movement can cause big losses.
On top of that, the trades are charged with high transaction fees by the FDMs (Forex Dealer Members), the intermediaries, which is not even legal to operate in Korea. (Korean law requires retail investors to go through authorized domestic investment broker).
Well, to make the transaction transparent, this system needs some change too.
Therefore, the Financial Supervisory Service will be supervising activities of security houses, future companies and other FX margin trade intermediaries. The regulators will also stricter advertisement guidelines in order to prevent related companies from luring private investors.
Therefore, supervision on intermediaries include whether the company’s website has sufficient and accurate fee schedule relating to FX margin trades, as well as inherent risks. And they will also monitor whether a system of assessing the client’s level of risk averseness and suitability of the trade is in place before setting up an account.
The system must also give a warning sign when the trade is judged too risky for the client’s risk profile. And lastly, the employee remuneration should be checked whether it is excessively tied to the sales performance on FX margin sales.
Edited by Peter Cheong