How to avoid becoming a victim of online trading scams

Online trading scams are on the rise and South African investors are urged to assess the legitimacy and licences of global trading platforms. Increasing fraud in South Africa has led to the Financial Services Conduct Authority tightening regulation on local markets and cracking down on this criminal activity.

“Traders must ensure that they use reputable platforms that have the necessary licences in place, such as an ODP licence, which demonstrates that a trading platform is following global best practice. This licence is granted to financial service providers that contract in over-the-counter derivative products (OTCs), such as contracts for difference (CFDs) and options, as well as certain indices and commodities,” Roger Eskinazi, MD of Tickmill South Africa, says.

Eskinazi says the potential losses are simply too great to entrust your money to brokers and platforms without the appropriate licences. “Regulation provides one of the most important safety nets for online traders and has made a significant contribution to providing a safer, more secure trading environment for investors.

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Transparency is important

“We have always been overtly transparent about the risks of trading in any instruments and the consequences. We believe that well informed, educated and empowered clients, who are disciplined and realistic about risk /return trade-offs and more importantly about their own abilities, tend to fare better and enjoy longevity as traders.”

This is where ODP licensing fills the gap, he says, by requiring brokerage platforms to comply with a code of conduct, characterised by strict parameters on aspects such as portfolio reconciliation, reporting, liquidity and the safeguarding of collateral.

Eskinazi warns that entering into agreements with unlicensed entities that are not governed by this code of conduct exposes investors to a high level of risk and the potential of falling victim to costly scams.

“Some of the most common scams involve the trade of forex, a popular OTC product that is traded outside of a centralised exchange.”

The past few years highlighted the high-risk nature of trading in derivatives, as opposed to listed stocks, he says. “Investors in listed entities on the JSE, for example, enjoy the protection provided by the JSE Market Regulation division’s regulatory oversight. However, the trade of OTCs involves a significant counterparty risk, which up until fairly recently, was not mitigated by regulation.”

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More regulation makes online trading safer

Until five years ago, the trading environment for OTC products was largely unregulated and mired in irregularities and trade agreements that offered investors no protection against fraud and other financial crimes.

The Financial Services Conduct Authority (FSCA) stepped in in 2018 and intensified its scrutiny of OTC brokers in the hope of bringing more transparency to the market. Eskanazi says interventions such as these have been pivotal in creating a robust regulatory regime for new and emerging trading platforms and avoiding catastrophes like the 2008 US subprime lending crisis, which was a watershed moment for regulators worldwide.

“This process was designed to ensure the highest level of public protection and that platforms have the right tools to help clients understand not only the potential rewards but also the risks involved.”

A further, more comprehensive layer of regulation is a positive development in this area, given the inherent complexity of these derivatives and Eskanazi welcomes the FSCA’s ruthless clampdown of rogue operators in this sector and the entity’s willingness and commitment to clean up this part of the industry.

“South Africans who are new to the world of OTC derivatives and want to explore their options in this market, are encouraged to check that their provider of choice has a legitimate ODP licence. This will be clearly indicated on the provider’s website and should be readily available should traders wish to review it.”