Ethical dilemmas in high-stakes Forex trading

Introduction

Leading financial markets with an average daily transaction of over $7 trillion, Forex stands predominantly in the world’s digital financial chain as one of the largest and most liquid platforms characterised by high investment and return rates. The forex market is highly volatile, and as much as this poses challenges, it presents lucrative trading opportunities, granting investors the chance to yield high potential profit upon strategic investment and trade.

The Forex market is always round-the-clock, and this attracts financial market experts, including both institutional and retail investors, increasing the chances of new trading patterns occurring within the market space. Despite the benefits these activities bring to the market, it creates room for unethical practices to thrive: where the Forex market is plagued by high capital risk because of fraudulent and malicious traders manipulating investors and embezzling their funds. The Forex market is open and mostly unregulated, causing conflicts of interest and destroying the integrity of the market.

“The Forex market is open and mostly unregulated, causing conflicts of interest and destroying the integrity of the market.”

To ensure that the market protects traders and that trades go on smoothly and fairly, ethical conduct must be postulated. These ethical considerations are even more needed in high-stakes trading involving hedge funds, large institutions, and experienced brokers, as it would help maintain stability in the market.

The Forex market structure

The forex market is decentralised, meaning the exchange of currency and trades operate at a continuous pace without a central regulatory body to oversee its affairs as it is in stock trading. While the Forex open market breeds limitless transactions and encourages creativity from brokers, the lack of regulatory bodies serves as a leeway to shrinking the market to the firm grip of vulnerability as experienced Forex players may exploit trades and investments for personal benefits.

In Forex, there’s a gap in accessing information. High-stake forex traders, which are composed of institutional investors, governments, central banks, and large corporations, absorb power to significantly dominate the market. The other side of the divide, which is the retail traders, who constitute a small portion of the market, are left to struggle for direct information, resorting to the reliance on brokers for access. It’s this heavy reliance and helpless trust that leads to unruly exploitation. If there was an active body monitoring broking and trade patterns, exploitations would be easily prevented.

As a decentralised system, together with a 24/7 open form of operation, there are plenty of chances for the market to be eroded by unethical perpetrators, mostly from the market players who would do anything to retain their dominance. The lower part of traders, the retailers, are at a disadvantaged point; hence, ethical questions about fairness and equity have become a major concern for Forex, particularly as regards the credibility of the financial venture.

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Some of the major ethical dilemmas present in high-stakes Forex trading include:

• Market manipulation

Unethical Forex brokers and high-stakes investors manipulate currency prices to create false market conditions, causing market instability and losses for retail traders. Spoofing, where traders place large orders and cancel them midway, can cause trade crashes. The forex rigging scandal between 2013 and 2014 involved high-stake investors manipulating benchmark rates, affecting trillions of transactions. Banks influence currency rates, leading to fines and highlighting the need for regulation in Forex trading, particularly in interbank trading. This highlights the need for stricter regulations in forex trading.

• Insider trading and information asymmetry

Forex participants often gain exclusive information that can influence currency prices, known as information asymmetry. This can lead to pre-informed decisions and disadvantage uninformed participants, especially in high-stakes trading. In 2019, a record of information asymmetry led to unexpected market movements, with the Yen currency surging due to large institutions’ inside information, causing losses for small Forex participants.

With a decentralised market system, inside trading might be difficult to regulate even when regulatory bodies like the U.S. Commodity Futures Trading Commission (CFTC) and the UK’s Financial Conduct Authority (FCA) have tried to reduce insider trading, but on a global scale, the challenge still thrives.

• Transparency issues in broking practices

Forex brokers are notorious for their lack of transparency and fluctuating decisions, which can lead to retail traders being victims of undue fees or gullible claims about their proficiency. The FXCM “No Dealing Desk” scandal in 2017 highlighted the lack of transparency and the exploitation of retailers by brokers. Retailers should transact with reputable and regulated brokers, ensure transparency in trade execution, and rely on reviews from trusted websites like Trustpilot, Forex, or Peace Army. These reviews provide shared experiences with different brokers, helping them avoid bad practices and ensure a fair trading environment. Retailers should also ensure that brokers are transparent about their trade execution and that they are aware of the potential consequences of their actions.

• Leverage and risk management

While leverage is beneficial in terms of managing risk by allowing traders to obtain and control large portions of trade with small capital, yielding both profits and losses, it’s offensive when retail traders are handed high leverage since they are mostly inexperienced, which sums up strong unethical behaviour. This was evident in 2015 when Alpari UK collapsed as a result of high leverage.

• Algorithmic and High-Frequency Trading (HFT)

Algorithmic and high-frequency trading (HFT) in Forex are usually spiralling to an all-time high. This has given rise to ethical concerns as some traders take excessive advantage of it. In algorithmic trading, algorithms execute trades in milliseconds; as a result, only high-stake investors leverage on the benefits, leaving small players with little access to advanced technology and no chance to navigate trades in this regard.

• Conflicts of interest in broker-client relationships

In Forex, many brokers are fond of trading against their clients. This is a trick that they practice to test new trading patterns, backfiring against clients as brokers earn a trading edge when clients’ initial trade is lost. While some brokers claim to have never indulged in this practice, they, however, admit to the temptation to influence prices whenever clients trade. Interests here become conflicted as brokers never really want the best for their clients, anyway. They see clients as opportunities to make more gains, and this is the reason why regulatory bodies could help to make brokers stay transparent when transactions are being made.

The FCA, CFTC, and ESMA are tasked with maintaining integrity in the Forex market. Despite ethical rules like limiting leverage, reducing market manipulation, and ensuring transparency, these issues still dominate.

It’s crucial for these bodies to uniformly distribute their laws globally, with regional subunits and strong penalties for erring participants. This would significantly reduce atrocities within the Forex market space.

Ethical conduct in the future of high-stakes Forex trading is a bit dicey as more technologies emerge and more complexities arise in Forex operations. However, through the advancement of AI, machine learning, and decentralised finance (DeFi), there’s hope that malicious trends from high investors and brokers can be easily spotted.

Also, the growing interest in corporate social responsibility (CSR) in financial markets could serve as a course that promotes the need for ethical behaviours because when firms strongly uphold transparency, fairness, and accountability, there’s a high chance that they are likely to attract more clients because of the trust they have in the brand.

Conclusion

Forex trading is clad in dicey situations that prompt unethical behaviours. Most of these behaviours pose a threat to the relevance of Forex in the stream of financial markets, reducing interest from existing and prospective investors. To avert these situations, traders, brokers, and regulators must rise up to the occasion, ensuring that they embrace ethical standards like transparency and fairness in their dealings.

Temitope George Ijibadejo is an award-winning Forex fund manager with over 15 years of experience as a Forex fund manager, business developer consultant and trainer in Forex trading.