Web opens up currency speculating

Mom and pop can enter this risky investment game

By JIM KRANE Associated Press

Monday, April 15, 2002

New York -- Talk about falling trade barriers.

Speculating on foreign currencies used to be the privilege of giant banks and wealthy financiers like George Soros, who famously made $1 billion in a week betting against the British pound.

Now, it is within reach of the small-time private investor. Web sites have unlocked the world's 24-hour currency markets to anyone with a few thousand dollars -- a far cry from the million-dollar minimum trades required by the big banks.

But financial experts say retail currency trading isn't a good idea for mom and pop. Besides attracting fraudsters, speculating can devastate the finances of an inexperienced investor.

"I advise most people to steer clear," said Bryan Lee, a financial planner in Plano, Texas. "If you play a good game of blackjack, your odds are better."

Currency trading has followed the same trajectory as stock trading, albeit more slowly. In 1973, when gold-backed currencies were dropped for floating exchange rates, big banks handled trades by telephone.

In the mid-1990s, the system opened slightly, with banks creating electronic trading networks such as FX Connect, which still catered to corporate clients trading money in massive lots.

"As an individual, if you had $10,000 and wanted to trade foreign exchange, you couldn't do it," said Samantha Roady, marketing vice president at GAIN Capital, one of a handful of online trading ventures that cater to small investors. "You either got turned away as a nuisance or you'd get a price that was so bad, it was almost impossible to make money."

The emergence in the late 1990s of currency trading Web sites such as GAIN and its competitors MG Financial, Hotspot FX and Britain's CMC Group, finally dealt the little guy into the game. They offer currency in smaller lots and freewheeling margins as high as 100-1, so that a $5,000 deposit can leverage $500,000 in foreign currency.

The tools available at trading sites look and feel much like those for trading stocks at E-Trade or DLJ Direct.

But currency speculation is quite different.

The currency market is many times larger than all the U.S. stock markets combined.

Foreign exchange activity is so prevalent -- $1.5 trillion changes hands every day -- that it can be imagined as a weather pattern of electronic cash flows, with major currents running between the United States and Western Europe and Japan.

Much of the money isn't bought and sold by speculators. Any company or individual that does business abroad -- even for simple things such as owning stock in Nokia and other foreign companies -- is a party to a foreign currency trade.

Speculators bet on the economic outlook of an entire country, not a company. If a currency looks undervalued, they buy it. If it's overvalued, they sell. Variables are myriad. Profits and losses can be huge.

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