Why do the RBA and APRA allow this?

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You may have seen this ad on TV for “uncomplicated forex trading, with leverage at up to 400 to 1”. I have no problem with FX trading for banks, companies, and traders, but this seems aimed at mums and dads, who mostly would have no idea that this is straight gambling. Not that I’m against gambling, but at the roulette table at least you aren’t able to leverage 400 to 1. I’m not sure who regulates this, but marketing FX trading to mums and dads is a recipe for the sequel to our Swiss loans affair. I wait for the legal cases with interest, as I’m sure that these products would not be adequately explained to most of the clients of these types of companies.

18 Responses to "Why do the RBA and APRA allow this?"
  1. I would prefer advertising for this product than for centrebet all through the football.
    “It’s only half time.  Did you know you can bet from your mobile phone? Go on. Check the odds.”
    And the fine print at the bottom of the screen – gamble responsibly.
    I can’t believe that tobacco advertising is banned but this is not.

  2. I agree. …though again the issue is that it is harder to leverage centrebets. However I would agree that we don’t need advertising for gambling at all…or tobacco.

  3. I’ve beeing learning to day-trade for a couple of years now and there has been an explosion of FX scams and offers in that time aimed at the part-time punter (it is betting after all).

    While there are plenty of cons out there, there is also plenty of suckers (including friends) who ignore the widely published advice that 90% of mum & dad players will do their dough in the search for easy money.

  4. Cigarette advertising has been banned for more than 20 years. That is very simple to do. You can’t ban parting fools from their money, but you can make it a lot more difficult for snake oil salesmen in the financial markets to find the fools.

  5. I am interested in your definition of gambling when you say, “…who mostly would have no idea that this is straight gambling”.

    I would usually take gambling to be a risky activity with an uncertain outcome and a negative expected return, (e.g. roulette or lotto) as different from investing in which the outcome is still uncertain but it is reasonable to assume that the expected return is positive (or else why would anyone engage in it?)

    If you are claiming that FX trading is an extremely risky endeavor then only a fool would disagree. However, if you are asserting that FX trading is gambling in a negative expected return sense then I would probably disagree with you.

  6. There is no comparison with tobacco.

    This is simply another way of making a lot of money by use of huge debt financing. Of course it is it is an easy way to lose bucket loads of money as well.

    you just have to make sure that the people selling are indulging in due diligence with regard to selling the  product not ban it completely.

    There are a lot of examples of shoddy investment products.
    these people then get prosecuted by ASIC.

    That is how it should be rather that an outright ban.

    People have the right to lose money as much as to make money.

  7. You have to believe a) that the regulators will do their job here, and b) it is better to have APRA come in and clean up the mess rather than be proactive. I don’t believe either. If you look at Shiller’s book on Reforming US financial markets he writes of house appraisers in the US being paid by mortgage originators. The point is the same here – you cannot trust people to properly explain these products to mug punters because then their business model would break down. I think that the consumer protections originally proposed in the US reform act are extremely important to avoiding crap like option-ARMs that most buyers simply did not understand. In Australia we have avoided many of these problems through having mortgage regulations require lawyers explain mortgages to borrowers. This should equally apply to any leveraged product marketed widely.

  8. yes I understand all the ‘practices’ of the US housing boom however you wouldn’t ban everything there. Surely the best thing is to make everything transparent rather than banning ads. Regulation is not banning a product indeed regultions facilitate IF DONE PROPERLY. 

  9. d-b, maybe I’m missing something but the analogy with gambling is broadly accurate.
    It’s actually more akin to sports betting than roulette, because punters with superior information can actually beat the “odds” over time.  However, there is a negative expected return, because the assets being traded are not income-generating ones, and the company providing the trading platform charges for it.  Furthermore, small investors are likely to have less information available to them than the full-time professionals, and are therefore (as a group) likely to making net losses on their trades.
    I think Mark is 100% right; this is a disaster in the making.

  10. Do we have to have ban or no ban. Can’t we make it more costly for people to participate. Like you have to pass an exam in international finance if you want to be able to make leveraged currency bets? Then it is harder to cry to government after you loose or your money (the exam would cover the risks like the expected value from your betting is zero).

  11. d–b my point would be that the expected return is in fact negative, if you believe the vast literature suggesting that the exchange rate is a random walk. Even if you do believe there is predictability a la some of the fractional integration or FEER literature for example, then the short run predictability is still basically zero. So once you take brokerage into account it is negative expected return. I buy your point Roger, but would suggest that once people had passed such a course in International Finance they wouldn’t trade currencies. So why bother?!

  12. Mark, it comes down to personal liberty, and the view that there has to be compelling reasons to ban something outright.
    We don’t ban people from day-trading stocks, despite the fact that that is almost certainly a negative-expectation strategy.= when you take brokerage into account.

  13. I am with Mark on this: if you expect and ask the community to clean up when things go wrong, which is what happens in GFCs and when crooks are done with their victims, then the community not only has the right but the duty to try and prevent the necessity of having to clean up.
     
    I find the opposing view, which is that the wolves should be allowed to have their way with the sheep and where it is the Sheppard’s job to bail out the wolf when it is in trouble, morally dubious.

  14. Paul, the appeal to the GFC is a stretch. for example it apears now a lot of sub-prime loans were originally prime loans. There are a lot of other differences as well. It isn’t particualy hard to decipher the risk involved here or to regulale I would have thought. Way back when people got into trouble with foreign currency troubles. you didn’t have to ban them merely have them explained. 

  15. I can see where your coming from but excluding “mum’s and dad’s” isn’t the solution either. Just like I can’t trade bonds unless i’m a registered dealer which frankly I find ridiculous. If i’ve got the 100k to buy a bond issue why can’t I? NANNY STATE. I think you’ll find the regulator is ASIC as well. APRA only supervise deposit taking institutions

  16. In response to “d-.-b”, forex trading does have a negative expected return, as long as you assume that:
    1) the person trading does not know more than the rest of the market about the future trajectory of the relative price of the currency they are trading; and
    2) the person is paying fees for the privilege of trading.
    I think the first assumption is reasonable, since currencies are incredibly difficult to predict and since other players in the market have far more resources dedicated to the problem. There is no doubt that the second assumption is correct.
    As a result, the trader has a higher expected return (and lower risk) if they do something more sensible. Isn’t that gambling?
     

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