The ads promoting foreign exchange trading have proved to be too irresistible for many Turks over the past several years. Tantalized by the prospect of “turning $1,000 into $1 million,” tens of thousands of greenhorns put all their money into leveraged transactions only to end up flat on their backs.
Leveraged transactions on the foreign exchange market (forex) multiply earnings, but they can also deepen losses, especially for individual investors unversed in financial markets who tend to take high risks in the hope of making quick money. Until recently, the maximum leverage ratio on foreign exchange trading in Turkey was as high as 100:1, which led aspiring millionaires to turn the market into a virtual casino.
The daily trading volume for the global foreign exchange market is more than $5.5 trillion and is dominated by institutional investors, such as financial funds, companies and banks. In Turkey, the market was legally regulated only in 2011. Thousands of Turks with lower and medium incomes ventured into this relatively new realm, using their savings or selling homes and cars to raise starting capital. In several years, “forex fever” pushed the daily trading volume up to $16 billion-$17 billion. To grasp the magnitude of this figure, keep in mind that the daily trading volume at the Istanbul Stock Exchange stood at about $4 billion on Feb. 28.
The main driving force behind the forex rush was the high leverage ratio. Retail investors were able to trade in sums 100 times larger than what they had deposited. The result, however, was devastating.
People from various walks of life went broke and had their lives turned upside down. In October 2015, for instance, the press reported that some self-styled brokers, who had collected nearly 450 million Turkish lira ($121 million) from soldiers at various garrisons, had crashed on the foreign exchange market. Building a network similar to a “pyramid scheme,” they had promised big earnings and were able to gain soldiers' trust by initially delivering 10% profits. Eventually, however, they reportedly lost even the original capital.
In September 2016, 10 owners of major companies dealing in foreign exchange and gold at Istanbul’s Grand Bazaar were charged over an armed altercation with brokers after allegedly losing $3.3 million in leveraged transactions at the foreign exchange market.
The grievances grew to such an extent that parliament’s Petition Commission created a subcommittee to look into victims' complaints. Bulent Oz, a commission member for the main opposition Republican People’s Party, told Al-Monitor that more than 20,000 people had been victimized and millions of dollars wasted. “The losses are huge,” Oz observed. The daily Sabah, citing government officials, reported Feb. 24 that the losses stood at about $500 million.
Arif Unver, head of the Capital Market Investors Association, said that on average 80% of retail investors lose money in leveraged trading on the foreign exchange market. According to him, “[Turks] are eager to make a killing and exit the market rather than make long-term investments. As such, the dynamics of the forex markets mesh with the profile of the Turkish people.”
From 2011 to September 2016, some 120,000 people put down deposits to open accounts for foreign exchange trading, according to the latest report of the Capital Markets Union. The number of active clients reached 37,000 in 2016, up from about 7,000 in 2012.
As a result of the growing controversy, the Capital Markets Board (SPK) took action Feb. 10 and lowered the leverage ratio from 100:1 to 10:1. This means that investors can now make a transaction of only 10 liras for every 1 lira they deposit rather than 100. In addition, the SPK set a minimum deposit of 50,000 lira for such transactions. “This aims to prevent individual investors becoming potential victims of high leverage,” the SPK said of the decisions.
The new regulations represent a victory for the three-year struggle of the Forex Victims Platform, which was instrumental in pushing parliament and the SPK to step in. In a statement hailing the restrictions, the group said, “Our nation has been rescued from the teeter-totter fraud of the 100:1 leverage. For us, this is a day for celebration. The SPK has finally responded to the outcry of the nation, and Turkey has stepped back from the biggest mistake of its financial history.” The statement noted that the leverage ratio in the United States was 20:1 and insisted that brokerage firms and the SPK jointly compensate people who had suffered financial losses.
Following the new restrictions, the daily trading volume fell sharply, to $2 billion. In a televised interview Feb. 23, Deputy Prime Minister Nurettin Canikli defended the restrictions, saying, “Had we carried on for a little longer [with the old leverage], Turkey would have become a digital gambling house.”
In remarks to Al-Monitor, Masum Turker, a former state minister for the economy, said that due to poor regulation and supervision at the outset, the foreign exchange market had encouraged dubious transactions and speculators taking advantage of digital technologies. “Most people who lose money here are amateurs,” he said. “They are unable to closely follow [financial] developments, and that’s why they lose.”
Yet not everyone is happy with the tighter rules. Parliament’s Petition Commission is now receiving complaints from brokerage firm employees who claim that 3,500 jobs are at risk in the sector due to the lower trading volume and want the leverage ratio raised anew.
The foreign exchange market is certainly not a casino, but it has the potential of being turned into one. Despite the risks involved, such a development is in full swing around the world as a tool institutional investors use to hedge their exchange rate risks.
Although Turkey has drastically lowered the leverage ratio for now, it could feel the need to raise it in the future, though not as high as 100:1. As former Treasury chief Mahfi Egilmez observed, a Turkey that wants to make Istanbul, its biggest city, a global financial hub cannot restrict or ignore one of the world’s major financial instruments.