Watch out for those retail risks

The regularity with which these stories surface is alarming. There seems to be an endless stream of villains prepared to hoodwink gullible customers into parting with their cash on the unrealistic promise of strong returns.

These court cases should act as a warning to banks looking to expand into the retail market, and for the established specialist players that are already there. The last story we ran where the CFTC prosecuted introducing brokers was sourcing liquidity to FXCM.

While it was in no way implicated in any wrong-doing itself, FXCM paid large sums to the aggressive introducing brokers who misled customers about the returns they received. This highlights the danger of farming out distribution capabilities, and means retail platforms need to look carefully at where the money is coming from.

Foreign exchange trading is an inherently risky business, and investors should be prepared to occasionally lose what they invest. Those offering trading facilities to private investors need to make it eminently clear that this is the case. The fact that FX is such a liquid and unregulated market means opportunities for the corrupt and greedy are rife.

If we are to avoid another Refco-style scenario, everyone involved in the business will need to keep a sharp eye on where money is coming from and how foreign exchange investments are being marketed to end-clients.

Banks such as Deutsche and Standard Chartered understand this, and have put safeguards in place to ensure the right people are targeted and that they understand the nature of the risks involved. However, the further big players in the market go down the value chain in a bid to attract liquidity, the more likely it is that their reputation could suffer.

Sooner or later, some unsuspecting grandmother will punt on a long yen play that sees her life savings go up in smoke. Headlines caused by too many of these occurrences could see rapid retrenchment out of what, if approached cautiously, can be a valuable source of revenue for the biggest players.