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You Too Can Make Millions With Unregulated, Leveraged Derivatives In Chile

On Thursday we learned that becoming a millionaire is surprisingly easy. All you need to do is raise some startup capital, find a dying company whose stock is still fairly liquid, then loan the company money on the condition they allow you to convert the receivable into common at a discount to where it trades in the market. Somehow that’s legal even if, as Bloomberg noted (completely missing the irony of course), it’s too “sketchy” for Wall Street investment banks. 

On Friday, we got the story of ForexChile, an outfit out of Santiago that makes money on a similarly straight forward business model. According to Bloomberg, the company is Chile’s largest purveyor of CFDs. The concept is very simple. I sell you a contract that obligates me to pay you the difference between the current price of something, and the price of that something when you close the contract. That’s assuming you guess right on the direction of the price change. Of course in most cases you won’t (the house always wins) and if you guess wrong that means you pay me, and because you were leveraged in the first place, the market doesn’t have to move against you by much to wipe you out. Here’s more via Bloomberg

It’s noon inside the offices of ForexChile in Santiago, and dozens of salespeople are working the phones, talking up investments linked to everything from Facebook stock to copper futures. They hold out tantalizing prospects to those on the other end of the line: potential returns of 20 percent, 30 percent, even 40 percent.


Familiar, yes -- and illegal if this were the U.S. Because what these people are selling are neither stocks nor bonds nor futures nor funds. They are offering contracts for difference, financial derivatives that are off-limits to retail investors in the U.S. and highly regulated elsewhere…


How CFDs became a hot investment game in Chile is a story of savvy marketing and nonexistent oversight. Such contracts are allowed in two dozen other countries and are particularly popular in the U.K., where the value of annual trading is estimated to exceed $900 billion. There, as in Chile, these investments tend to draw small-time speculators. As with get-rich investments everywhere, most investors lose money most of the time…


But in most places, regulators police the market somehow. In Chile, no one does. Virtually anyone can sell or buy CFDs, regardless of their financial means or experience.


Most CFDs employ one of the most powerful forces in investing: leverage. In Chile, leverage sometimes stretches as high as 100 to 1.

As you might imagine, marketing unregulated, highly leveraged derivative instruments to Chilean retail investors via radio ads is a business that is not generally conducive to client success, as Bloomberg found out when they spoke with Loyola, who apparently did not have a good read on how Cisco, JPM, and Hewlett-Packard were likely to trade over the short-term: 

Amira Loyola, says she had no idea what she was getting into when, responding to a radio ad, she deposited 4.5 million pesos ($7,400) into a ForexChile account in 2011. She said her broker recommended CFDs linked to shares of Cisco Systems Inc., JPMorgan Chase & Co. and Hewlett-Packard Co…


Six months later, Loyola, a 52-year-old information technology specialist, was down 92 percent.. The underlying stocks had fallen by a third, but her leveraged investment had magnified the losses.

ForexChile certainly doesn’t constrain the Amira Loyolas of the world when it comes to what they can bet on. The company’s website features CFDs on currencies, shares, indices, commodities, and ETFs. To be sure, there are a lot of advantages to trading CFDs with ForexChile, including (but certainly not limited to): the ability to look at a price quote, the freedom to make your own uniformed decisions with no meddling from anyone who knows what they’re doing, the leeway to bet 100 times the amount of money you actually have instead of only 15 times, access to charts that aren’t outdated, and importantly, the ability to maximize your chances of failure by day trading.

From the company:

Advantages of Investing With CFD


“The investor can see the prices completely online.”


“As an investor, you are who manage your own money with just a click. You must not make or rely on third parties to enter or exit positions. Open your terminal determines the price at which you want to enter the market and then enter the operation. It's that simple.” 


“With ForexChile you can apalancarte up to 100 times your initial warranty. This means if you have $ 1,000,000 in your account, you could open a position of $ 100 million of the base currency, unlike other markets where leverage can be up to 15 times the initial amount deposited.”


“Additionally, allows to apply technical analysis studies such as Moving Averages, MACD, Bollinger Bands, RSI, ATR, etc. With these powerful features you can decide safer operation. In other markets the information is poor and outdated.”


“The vast majority of operations are performed as intraday. That is, as an investor you can open and close positions within minutes, as several hours or even days.”

If all of that isn’t enough to get you excited about trading CFDs in Chile, then you may want to check your pulse, but in the event a prospective client comes along and doesn’t think leveraged derivatives are the right choice, CEO Cristobal Forno has some advice: “If you want less risk, then put your money in a mutual fund.” And that may be the best advice because when asked by Bloomberg how many of ForexChile’s customers lose money, Forno estimated the figure was around 70%. 

*  *  *

The real punchline here is that Forno and ForexChile have actually asked, on several occasions apparently, to be regulated:

Cristobal Forno, the 33-year-old chief executive of ForexChile and one of its founders, says regulation would give investors more confidence. His firm, which employs about 180 people in Chile, has met with regulators multiple times to ask for oversight, he says.

In other words: the more legitimate we appear to be, the more people will hand us their money.