Common forms of financial market scams and investment fraud in the Philippines:
a. Ponzi schemes
A Ponzi scheme is where the promoter guarantees investors high-yielding investments without any risk. However, there is no real investment. Here is the usual flow of a Ponzi scheme:
- The promoter entices people to invest in their scheme with promised returns such as 10% per month. They even go as far as giving out postdated checks to gain the trust of investors.
- Then, they use the funds of early investors to pay the first dividend or payouts until investors feel more confident in investing more money.
- Furthermore, promoters give commissions up to 20% or even brand new cars to investors when they recruit their family in friends to join in.
- Eventually, the scheme collapses when new investments are not able to cover the payouts. By this time, the promoters have run away with all the money.
“If it’s too good to be true, it’s probably not.”
b. Bad Forex brokers and Binary Options
Bad Brokers take advantage of the fact that 95% of traders lose. Instead of passing the trades to liquidity providers (LPs), they fill the trades themselves and forcefully make the trading conditions for their clients difficult and make them lose easier. The responsibility of brokers is to enable retail traders to trade in the market with small capital. The trades are passed on to LPs who fill the trades for the clients. In that process, brokers earn from the spread or commissions whenever trades are made. However, there are brokers that fill the trades on their own for their clients instead of passing them to LPs (market-making). If this is the case, when clients earn money, brokers lose. On the other hand, when clients lose money, brokers earn. As a result, some brokers try to take advantage of this and tilt the odds to their side. Some intentionally make the trading conditions difficult to the clients such as:
- Widening the spread
- Stop hunting
- Rejecting orders.
In retrospect, market making isn’t actually a bad thing. However, forcefully making trading conditions difficult for clients is bad. Moreover, Binary Options are closer to gambling than trading. This is where clients can bet if the price will be higher or lower against a designated price level after a certain period of time. If they are wrong, they lose the amount they bet. If they are correct, they win a smaller amount than what they originally bet. Binary Options is much more difficult to trade because it adds the element of time. In most analysis, future price levels can be forecasted, but the exact time when it will actually go up or down is very difficult to predict. The best way to avoid these difficulties is to know about the broker you’d like to trade with.
- Check out their licenses and regulatory bodies that oversee them such as the FCA, FMA, ASIC, CYCSEC, IFSC, etc.
- Also, take some time reading about broker reviews and asking the local community about their feedback.
- In addition, try trading with them to test out if the trading conditions are fair or do they make it difficult for you.
c. Fraudulent fund managers
Fund managers entice investors to invest in them and trade on their behalf. However, there are fraudulent fund managers whose objectives are different from their investors. They look to make quick profits in the market at the expense of their investors. Let us give you an idea of how fund management usually works, then show you some deviations where fund managers can abuse the system for a quick buck. Fund management in Forex is usually done with a PAMM, MAM, or a proprietary copy trading system from the broker. The setup allows the fund manager to connect the accounts of the investors to the main account. The main account is traded by the fund manager and the trades reflect on the investors’ accounts. Kindly note that investors HAVE THEIR OWN ACCOUNTS named and verified after them. This restricts the access to withdrawals to the investor alone, while only giving the fund manager freedom to make trading decisions on the investors’ behalf. In return, the fund manager profits through several means:
- The first one is performance fee. In this process, whenever there is profit made, it is automatically split between the fund manager and the investor. When there is no new profit, the fund manager doesn’t get anything.
- The second one is management fee. Whether the fund manager is profitable or not, there is a fixed annual management fee (usually 2% of the amount invested). This ensures that the operating expenses are covered even when the fund isn’t doing well.
- Lastly, fund managers also gain through trading commissions. Whenever trades are made, fund managers earn a part of the spread that the broker earns.
In contrast, there may be some fund managers that abuse this system when investors are not well informed. This can be done through several means.
- Firstly, fund managers may ask the investors to give them the money directly instead of having their own accounts opened. THIS IS A HUGE RED FLAG. If you don’t know the person you’re dealing with, they can easily turn it into a Ponzi scheme and/or run away with the money.
- Secondly, managers earn a lot when they make a lot of high volume trades from commissions. Some fund managers intentionally make many unnecessary trades to generate commission without regard to the investor’s money. This is called “churning”.
To avoid these people, make sure to know who you’re dealing with. Check out and verify if the trading history and the portfolio of the manager are genuine. Also, make sure not to forget to open your own account when having a managed account.
d. Pump and dump
Pump and dump are when schemers buy a lot of shares of a low-priced stock. Then they promote the stock as a great pick to invest in. As more investors come in, the price of the stock rises rapidly. Once it’s highly overvalued, the schemers sell all their shares, and the stock price crashes. They basically used new investors to propel the prices upward and as liquidity for them to be able to sell their shares at the top. The investors are left with a bloody portfolio. It’s not really much of a scam as it’s an excellent (but dirty) trading strategy. This is present in all the financial markets to some degree. However, it is most visible in stocks (such as our local Philippine Stock Exchange) and in cryptocurrencies.