By Ira Iosebashvili, James Ramage and Alexandra Wexler
When Simon Mammon turned on his computer at 4:30 a.m. Thursday
to check his trading portfolio, the owner of the Simon Sips cafe in
Midtown Manhattan was just in time to see his bet on the Swiss
franc SHYimplode.
The trade--a wager that the franc would weaken against the
euro--had fluctuated by about $40 over the previous three weeks.
That morning, it plunged by thousands of dollars after the Swiss
National Bank announced it would no longer prevent the franc from
rising, instantly sending the currency up 30% against the euro
after three years of SHYstability.
"I was literally still in bed," said Mr. Mammon, 51 years old.
"I'm trying to understand why all of a sudden it was down $2,500.
When I looked away and looked back again it was five or six times
that."
Mr. Mammon--who says he had juiced his bets by borrowing 20
times the amount of his original investment--sustained losses that
day "well into the five figures." He was far from alone among
retail, or individual, investors hit by the giant swing in the
Swiss franc against the euro and dollar. Some of them had staked
large sums using just tiny amounts of cash. It was a rare event
that revived long-standing investor complaints about the retail
foreign-exchange market.
Investors and analysts say the fallout is a major black eye for
an industry that has struggled to escape a bad reputation--as a
haven for unsound practices that is frequented by unscrupulous
operators and novice traders who unwittingly amplify the risk of
losing their stakes by using huge sums of borrowed money, or
leverage.
"Historically, a lot of the FX brokers have been notoriously
shady," said Larry Tabb, founder and chief executive of the Tabb
Group, a research firm. The industry "has come a long way...in
creating a reputable product."
Retail traders span the globe, from New York to Tuscaloosa,
Ala., to Kuala Lumpur. Lively communities fill online message
boards devoted to currency trading; one thread about the
euro-dollar trade contains over 950,000 posts dating back 11
years.
Of the estimated four million retail foreign-exchange traders
world-wide, the majority are in Europe and Asia, with only 150,000
in the U.S., according to data from Citigroup Inc. Most are male,
with a median age of 35.
Just 30% achieve monthly positive returns, the data showed.
About two-thirds of U.S. clients at FXCM Inc., the broker that was
rescued Friday by a $300 million loan from Leucadia National Corp.,
lose money each quarter, according to filings.
Some experts believe the losses suffered by "mom and pop"
investors will bring more scrutiny to this corner of the $5
trillion-a-day foreign-exchange market, where risk is high and
rewards elusive.
Brokers allow traders to place bets of as much as 50 times their
initial deposits in the U.S., quickly magnifying small currency
moves into sizable gains or losses. In Europe and parts of Asia,
leverage can reach 200 to 1, or higher.
"This is certainly going to spark regulator review, specifically
regarding leverage," said Richard Repetto, an analyst at Sandler
O'Neill + Partners.
A spokesman for the Commodity Futures Trading Commission, FXCM's
primary regulator in the U.S., said the agency is reviewing the
company's situation but declined to elaborate.
This past week, some firms in Russia and New Zealand also faced
woes, stopping trading or going into insolvency. Many retail
traders said they experienced problems processing trades and
withdrawing their money at other retail brokerages, as well.
The news hit in the middle of the night for San Francisco-based
Joshua Garrison, a former broker at FXCM. He now trades for his own
firm, PoseidonFX, which offers research and trading tips to retail
investors who are members of the site.
His firm had just, on Wednesday, made a bet that the euro would
rise against the Swiss franc, after seeing the franc approach its
cap of 1.20 to the euro. It was a wager they had made before
without issue, he said.
Around 1:30 a.m. Pacific time, Mr. Garrison got a call from
PoseidonFX's co-founder, Alex Boyd, another former FXCM broker. Mr.
Boyd was in a panic after getting the alert that the trade was
going haywire.
It took four minutes for them to confirm they had unwound the
trade, compared with the typical seconds. "We had to keep checking
and refreshing" the computer screen, Mr. Garrison said.
Their broker, CitiFX Pro, a unit of Citigroup, sent an email two
hours later advising clients they might revise the executed trades
to reflect worse pricing than they initially received. If that
happens, their losses could grow to $50,000, Mr. Garrison says.
Duane Sloan, 49, a certified public accountant and former mayor
of Wildwood, N.J., placed a bet through Toronto-based broker Oanda
Corp. at 3:47 a.m. Thursday morning that the franc would rise
against the yen. He was trading about 16,000 francs at 50-to-1
leverage.
Fighting insomnia, he said he had looked at the chart of the two
currencies on his iPhone and reckoned the franc was due to tick
higher. His account balance went from $361 to $2,703 in the space
of an hour.
"To be completely honest, it was luck," Mr. Sloan said.
When he tried to close out the trade on his phone, he initially
was unable to, because the broker had halted any transactions tied
to the Swiss franc, he said. About 15 minutes later, "I could walk
away and count myself lucky," Mr. Sloan said.
Tatyana Shumsky and Liz Moyer contributed to this article.
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com and
Alexandra Wexler at alexandra.wexler@wsj.com
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