Archive for August 16th, 2008

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FOREX “BOILER ROOM” OPERATORS- HIDDEN BEHIND THE MAZE OF MODERN DAY TECHNOLOGY

August 16, 2008


In the old days, “boiler rooms” referred to the back room operations of scrupulous brokers. So called “boiler rooms” because they are usually found in the cramp, secluded, steaming hot back rooms of small offices to

keep their illegitimate operations away from the prying eyes of authorities. In Hongkong, they were called sweat shops. Through the years the term boiler room became synonymous with scams and swindling operations. However, they now operate in style from well furnished offices situated in prime business districts. The boiler rooms of the old were usually situated in some obscure addresses.

Today, as if flaunting their ill gotten capital from extended years of scamming operations, they set up fully equipped plush offices, and this was for good measure – to hoodwink clients into believing their businesses are legit. Where did these people come from? And how are they able to operate almost anywhere with impunity?

Hong Kong and Macau were the centers of their scam operations before. Starting out with commodity futures trading they soon shifted to the much bigger foreign exchange market after the world embraced the open trade policy in early-1990’s.

During that time international foreign currency cash transactions were done only through big banks, and between and among the central banks of different countries, huge multi national corporations and giant insurance companies whose global operations were liven up by the open market policies embraced by almost all nations at that time. The transactions were usually in large volumes hardly imaginable by individual investors. Forwards or currency futures contracts were then traded through established exchanges like the International Monetary Market (IMM) of the Chicago Board of Trade and the London International Financial Futures Exchange. As global trade increased, so did the volume of foreign currency transactions which also brought about rapid and frequent swings in the rates of exchange of the different currencies. Entities involved in cash transactions found it necessary to hedge their risks with currency futures. Currency futures brokers on the other hand found it necessary to source their requirements for maturing obligations from the cash market. And that developed the linkages between the two markets – one , an informal network consisting of banks, multinational companies, and insurance giants linked electronically with each other, the other the established financial futures exchanges around the globe.

The increasing risks from exchange rate fluctuations forced some of the smaller banks dealing in spot cash transactions to find a way to spread out the risks. They needed volume. They needed more participants to partake the risks. So they adopted the leveraged trading system (margin trading) of the financial futures exchanges. Retail, off exchange foreign currency trading was thus born,

The boiler room operators were quick to identify this evolving opportunity for them in the rapidly changing financial market place. Leveraged trading was their forte and by experience, they knew that the unlearned investors would easily fall prey to another get-rich-quick scam specially so if they can easily pass it off as being bank-based! But are they?

One clear cut difference between a legitimate broker dealing in retail foreign currency trading (leveraged forex trading) and the forex boiler room operator is the fact that legitimate brokers are accredited investment intermediaries of either a bank or a member broker of an established currency futures exchange, while the boiler room operator operates on his own, faking off the linkages to the legitimate currency market participants with the use of sophisticated trading software and subscription to live market data feeds from legitimate sources.

A system to stream live the actual spot foreign currency transactions of various major participating banks, financial institutions and currency futures exchanges worldwide was developed by both Dow Jones and Telerate years before they merged. Anyone may subscribe to these services for a fee. And true enough, these services were used to the hilt by boiler room operators world wide using their own trading platforms which simulates actual trading in the interbank spot currency market. However, the funds invested through them were never really coursed to the inter-bank spot currency network, much less to a bank or an exchange. the money was simply bucketed!

Performance Foreign Exchange Corporation uses the eForex Asia trading platform the parent company of which Michael Liew also helped establish. Why didn’t the authorities then push on the investigation all the way to eForex Asia. This would have shown that neither PFEC nor eForex Asia have legitimate linkages to the forex market place. This would have proven PFEC is indeed selling the investing public short. This would have proven that online forex trading through PFEC is no different from the online casinos you see sprouting everywhere.

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FOREX TRADING IN THE PHILIPPINES -THE SEC’S PROBLEM WITH ITS OVERSIGHT FUNCTIONS

August 16, 2008

The SEC had been ineffective in going after Performance Foreign Exchange Corporation which has remained operational up to now despite the numerous complaints filed against the company by many of its disgruntled investors, and inspite of successive raids made by the National Bureau of Investigation (the local counterpart of the US’ FBI) into their offices. PFEC even challenged the cease and desist order issued by SEC against it all the way up to the Supreme Court and won.

How can this happen? How can the SEC be rendered useless by a forex boiler room operator?

In my opinion, SEC’s helplessness in the issue of PFEC was its own making.

  • First, it failed to keep up with the many changes happening in the financial markets specifically in the foreign exchange markets towards the turn of the century. It failed to notice that with the advent of advanced computer technology, a parallel market to the established interbank foreign currency trading network was fast evolving.
  • Second, the Philippine’s SEC was playing to the hilt its assumed role of being a copy cat of its US counterparts. Online foreign currency trading in the US is considered as commodity futures trading and falls under the jurisdiction and oversight functions of CFTC (Commodity Futures Trading Commission), an independent entity established through an act of the US Congress to regulate commodity futures trading in that country. Why under the CFTC? Well, in the US there are commodity exchanges like the Chicago Mercantile Exchange which deals on financial instruments such as currency futures. Spot currency trading then used to refer to and was limited to the buying and selling of the spot month (current month) currency contracts in these exchanges. Control and oversight functions for spot foreign currency trading were therefore under the jurisdiction of CFTC. However, US authorities were also quick enough to notice the advent of and the proliferation of online, off exchange, spot currency currency trading done electronically through banks with networks that spans every corner of the globe. And so the US congress,on the recommendation of CFTC passed “The Commodity Futures Modernization Act of 2000 (CFMA) which made clear that the CFTC has jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. ( Please refer to my earlier blog entitled Foreign Currency Trading Update, August 15, 2008.)

The Philippines SEC was lifting off and adopting policies and opinions from its US counterparts without studying its own local scenario falling into the age old colonial mentality of embracing the belief that “whatever it is that holds true in the US must hold true also in the Philippines. And so when SEC went up against PFEC in the courts of law, it was rebuffed by the highest court in the land (the Supreme Court) because it tried to pin down PFEC with the charge that it was illegally engaging in commodity futures transaction. (See my blog on this HANGING BY A THREAD (PART2 ) – (SEC BLUNDERED AND PFEC GOES SCOT FREE)•August 13, 2008 and HANGING BY A THREAD (PART1 ) – (OR HOW PFEC MANAGE TO REMAIN AFLOAT)•August 12, 2008)

The funny thing is from the advent of commodity futures trading in the Philippines in 1985 to its closure in 1997 which was followed by the influx of forex boiler room operators, the SEC was swamped with mounting complaints from forex investors. And take note, the revised Securities Regulatory Act of the Philippines was enacted in the year 2000, the SEC could have recommended revisions to the securities code as early as then but they didn’t.

Now, two years after the PIPC scam, it has not made any move at all to recommend revisions in the code which must incorporate clarificatory provisions that will define SEC’s jurisdiction and oversight functions over unregulated firms dealing with the buying and selling of spot currency contracts to include firms offering subsidiary forex services such as consultancy services, research, and forex trading platforms.

The US made its move in the year 2000 to regulate on line, off exchange spot currency trading. What has the Philipines’ SEC done?