Chicago Sun-Times: Currency speculation goes small-time

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."

The emergence in the late 1990s of Web sites such as GAIN Capital 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 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 much larger than all 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.

Much of the money isn't bought and sold by speculators. Any company or individual that does business abroad--even for simple things like 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.

"There have been months when I made tons of money, and months that I've lost tons of money," said Chris Marsh, a 41-year-old Phoenix speculator who has traded currency on his home PC for three years.

Unlike stock investing, Lee and others point out that currency speculation is a zero-sum game.

"If I earn money on foreign exchange, that means someone else is losing it," said Robert Iati of the TowerGroup, a financial technology consultancy.

Problem is, most currency is traded by titanic players like Deutsche Bank, whose experienced traders prowl the markets with powerful computer models. Pit against them, financial analysts say, the little guy stands little chance.

Marsh is undaunted. The Phoenix trader said leverage margins offered by online currency trading houses give access to enormous amounts of capital that, if used correctly, carry a far larger payoff than typical investments.