High Yield Investment Programs (HYIP) are (a lot of the time) a form of Ponzi scheme in which a high level of return is promised for a small initial investment into a forex fund. However, in reality, the initial investors are only being paid back by the money generated by the current investors and once there are no more investors in the scheme the owners usually close it down and take all money remaining.
This is a very common form of affinity fraud. They promise high returns from a small initial investment upfront. The early investors usually do gain some sort of return on their money and motivated by this success they then recruit their friends and family into the scheme. However, the truth is that the ‘investment opportunity’ does not actually exist and their initial return is being funded by money paid in by other members of the scheme. When the investor numbers start to drop the scammers close the scheme and take the money. We have covered this type of scam in-depth under the Ponzi & Pyramid scams section.
This old forex scam was based on computer manipulation of bid/ask spreads. The point spread between the bid and ask basically reflects the commission of a back-and-forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads differ widely among brokers. Brokers often do not offer the normal two- to three-point spread in the EUR/USD, for example, but spreads of seven pips or more. (A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) Factor four or more pips on every $1 million trade, and any potential gains resulting from a good investment are eaten away by commissions.
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These scammers tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted for formal review and tested by an independent source.
A popular modern-day scam is the signal seller. Signal sellers are retail firms, pooled asset managers, managed account companies or individual traders that offer a system – for a daily, weekly or monthly fee – that claims to identify favorable times to buy or sell a currency pair, based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities, plus testimonials from people who vouch for how great a trader and friend the person is, and the vast wealth that this person has earned for them.