As conspiracy theories go, the one you’re about to read about could provide one of the screen writers I talk with on an irregular basis fodder for a real thriller. In this story a geek develops a fool proof and virtually undetectable way to skim profits from his clients. Whether you are a forex trader, knowledgeable programmer, or devotee of creative conspiracy theories, you’ve got to love the imagination that went into this. I doubt there is a movie goer who has not seen at least one film glamorizing the inner workings of organized crime. One of those films came to mind during the course of a recent conversation with a self-proclaimed forex insider - a 40ish, ill shaven and shady character straight out of central casting that we’ll call Dimitri. The movie? “Casino” starring Robert DeNiro.
Why did recollections of that movie come to mind? What’s more, what has this got to do with foreign exchange trading? Here’s the long and short of it. Dimitri contends that the developer behind of one of the industry’s most popular trading platforms is actively involved in skimming dealer bank accounts.
The image that came to mind as he talked was that of a faceless “family member” walking past the casino cashier’s cage to the counting room where he fills a black suitcase with wads of money sitting in neat little stacks on a large table located in the center of the room. If Dimitri’s story is to be believed, couriers are no longer needed. Collections are done electronically.
So what’s the bottom line? Dimitri is convinced that one of the world’s most popular trading platforms was purposely designed to enable its developers the means to pick the pockets of their dealer clients. Having access to virtually every component of the transaction process, the developer is free to [and, if Dimitri is to be believed, actually does] manipulate pricing to pick the dealer’s pocket.
Imagine that - the suggestion that someone in this industry is manipulating pricing to make undisclosed profits. What is this world coming to?
I didn’t really catch on at first (I’d already had three beers and a plate of Hooter’s medium, breaded chicken wings - my contribution to the rapid extinction of human kind) but as the evening progressed, I began to get the picture and what a picture he paints.
A group of savvy software engineers, knowing that forex dealers really don’t have a clue when it comes to programming, develop a cutting edge foreign exchange trading platform that saves dealers the headache and expense of creating and managing platforms of their own design. Among other things, the package offers full service capabilities from order entry to the internal management of accounts and [most importantly] the delivery of pricing.
Imagine the implications here.
The developer sells and/or licenses the platform to scores of dealers. Having access to the entire process, the developer and his minions open multiple trading accounts with each and every one.
Now here’s the intrigue. Instead of opening positions accompanied by stop losses, the developer’s positions are accompanied by take profit orders. He spikes the dealer’s rates and collects artificially generated profits.
Got the picture? Classic example of skimming, wouldn’t you say?
Real or imagined, I asked how a dealer might go about protecting himself and, according to Dimitri, it is virtually impossible to document skimming activities using the program itself because, as he contends, it was purposefully designed to prevent that.
So what is a dealer to do? Apart from the obvious choice of using a different platform, the only recourse the dealer has is to close the accounts of those traders exhibiting one or more of the following characteristics and/or behaviors.
1. Any trader who opens a large account, makes a quick and sizable profit, and then either proceeds to quickly close the account or ceases to trade the account. The reasoning behind this, of course, is that few traders would close an account or cease to trade an account that shows a sizable profit over a short period of time.
2. Any trader who always enters take profit orders and seldom, if ever, stop loss orders.
3. Traders who have multiple accounts all of which are abnormally profitable.
4. Traders with IP addresses originating from the same geographic location as the developer.
5. Traders whose accounts seldom, if ever, show losses.
6. Consistently profitable traders whose trading habits don’t reflect some sort of recognizable trading strategy.
7. Accounts showing trades of short duration that show either consistent or inordinate profits.
Asked how he came to the conclusion that dealers using the software are just as susceptible to manipulation as traders, he responded. “I spent six months investigating suspicious trading activities with ‘XXX’ [dealer name withheld by request].
Real or imagined, you’ve got to admit that this is a great story.
To my screenwriter friends.
If you’re going to use this as the basis for your next spec, I can envision the movie beginning with an investigation of the deaths of a half dozen computer geeks who are found in a heavily wooded area south of Moscow. No doubt the fact that none of the bodies sport fingernails, eliminates the initial thought they were rubbed out by an underground collective dedicated to the pursuit of men who neglect to pay child support.
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