The Demon of Forex Gambling

Is it permissible to play backgammon using real money? The Israelis behind the Internet backgammon site Play65 claim that it's a game of skill, not a matter of pure chance. The police beg to differ.

If the police win their battle against casino site operators, poker and backgammon alike, Israelis will be left bereft of all their semi-legal gambling options. That leaves only one place to gamble while staying comfortably within the law: the forex market.

Yes, the forex market, where people and institutions exchange currencies, is the biggest financial market in the world. It's bigger than all the rest together. Any given day the eye-popping sum of $1.7 trillion changes hands - $17,000,000,000,000.

Israel's forex market is also the biggest in the land: more than $2 billion is traded every day, compared with $300 million in the stock market and $350 million in bonds.

At its heart, the currency market supports international trade. Importers and exporters trade in currencies to pay suppliers and collect from customers, usually through buying currency conversion services from a trade bank. But in recent years the forex market has become a market of speculators.

Banks do it, you do it

More than 90% of the transactions going down in forex are speculative, by people betting that a given exchange rate will go in a given direction. Banks do it, businesses do it, and private people do it, almost 24 hours a day, hoping for quick riches and meanwhile, getting a private thrill from the drama.

Why did the forex market turn into this haven for speculators, not some other market? well, for one thing, the stock market is not a real casino: traders trade in real assets. A share buys you an actual piece of an actual company, and if the company does well, the value of the share does as well. And vice versa, true; sometimes share prices become bloated; but over time, share prices reflect the true status of companies. All cynicism aside, a stock market is a place to invest, to save money.

Not the currency market: it?s a zero sum game. You win? Somebody lost. People don't usually hold currencies as long-term investments. Buying currency is almost always a speculative move, in which the gambler hopes its value will increase and that he can cash in his profit and move on quickly.

Also, the structure of the forex market is like a Vegas casino. It's open around the clock. You can bet any sum. The whole business is extremely liquid. Will leverage your assets times 50, but most importantly, every Tom, Dick and Haim knows it's impossible to predict currency trends in the short run. An exchange rate in an hour or day is all but random. Sound roulettish?

What game shall we play today?

Even the institutional investors in the forex scene - banks and dealers - are a lot like the "House" in Atlantic City. Look: say you call the dealer, or visit a website offering virtual currency trading. What do you do?

1. Pick a currency (ie, what game do you want to play?)

2. How much do you want to buy (how big is your gamble?)

3. How much money do you have (How much money do you have?)

4. How much credit do you want to get from your bank? (Real men don't want a roulette game that moves 0.5% a day. If the bank lends them 50 times their original stake, a 1% movement in a currency will translate into a profit (or loss) or 50% of your bet.

No bank will say it's running a gambling den or that its clients are risk junkies. But like any self-respecting casino, the bank does its utmost to extract money from its clients at every possible twist and turn.

The bank will tempt then to participate in as many games as possible. They'll urge them to gamble the highest possible sums. They make money on each transaction, you know: what they want is as many transactions as possible, as many gambles as possible.

The banks also know that at the end of the day, the absolute majority of its clients will have lost money, again just like in a casino. The exchange rate of the currency you picked might rise or fall but because of the transaction costs, your chance of making money is less than 50%.  Over time, a speculator will lose all his money.

Dealers are so confident that a majority of customers will be wiped out, that they don't even bother to cover themselves for the eventuality that a lot will win.

Websites offering currency trading have even figured out who the average customer is: a person with no formal education, investing an average of $2,500, and who will lose every sou within three months.

Scandalous? Disgu/sting? Sodom and Gomorrah? Not at all. First off, it's all legal. You don't need a broker's license to offer trading services because currencies aren't defined as securities. But then the players also know they aren't in there to squirrel away money  for their dotage.