Squeezing the pips

Iskandar Najjar, the CEO of forex giant Alpari’s UAE division, discusses the rising role of foreign exchange in the Gulf
Top currencies around $2 trillion is traded on the euro every day
By Jonathon Savill
Tue 20 Nov 2012 11:59 AM

I prefer not to trade personally,” says Iskandar Najjar. Given that Najjar heads up one of the Gulf’s fastest-growing foreign exchange brokerages, this is somewhat surprising. But he quickly qualifies that statement.

“The reason for this is that you are always emotionally attached to a position you take in the market. If I bought the euro, then subconsciously I’ll have an emotional attachment to euros and that could translate into discussions I have on the market. For me this is an ethical position, it helps to better service our clients.”

In the lightning-fast, high-risk world of forex trading, it’s good to know that one of the top players is sticking by the rules. By any standards, Najjar is doing well. He’s about to get his MBA from London Business School, and his wife is due to deliver their first child in the next few months. On top of that, he is also in charge of the regional division of Alpari, a global forex, precious metals and contract for differences (CFD) brokerage, headquartered in London.

There’s no doubt that forex today is pretty big business. Worldwide, the market has passed $5 trillion worth of trading in one single day. Any trader can leverage their stake a hundred times, while institutions are the end risk bearers. But if there’s been one criticism of the market, it is that forex trading is inherently risky. Needless to say, Najjar disagrees.

“It’s risky in its own ways, you’re limited on the downside to your stake,” he says. “You have automatic liquidation set to ensure that if the market goes against you, your maximum downside is the investment you have put in.

“The way that markets operate is that you take a position in the market and make a bid. We will match your price with a bank or an exchange. I’ll take your price, we operate a matching engine with the bank’s price. And that’s where technology plays its role. How fast can we match your price? If we have 20,000 orders a second coming in, we have to lay those prices off immediately. The challenge is having the technology to deal with that”.

Najjar goes on to explain that the market operates in the same manner for institutions as it does for retail clients.

“On a global scale, brokers such as ourselves have bridged the gap, whereby banks and hedge funds are trading on spreads that are very close to retail spreads, the spread being the cost of taking a position in the market,” he adds. “Over the years, we have clients who have made substantial amounts of money. One of our clients has made a million on his million over the course of a year and a half. Inexperienced. New to the market. We introduced him to the market.”

If it’s success stories that you’re after, then Najjar has them by the hatful. He recalls one recent short trade that took place during a period when there was a record low on the euro. The client saw the potential upside, and bought in at €1.21, sitting on it until it hit €1.31.

“He had a leveraged $5m position and he sat on a profit of a million,” Najjar says. “Because he bought at that price and was still holding that position. He had made 1,000 pips and at that point, I’d have walked away, other investors will choose to hold it for longer”.

Najjar admits that forex trading can be addictive, particularly given the massive liquidity in the market, and the levels of technological sophistication.

“There are wide jumps on the euro, but it’s more stable than it was two years ago,” he points out. “Nonetheless, when there is big news it jumps to very wide ranges. Wide movements in the market offer a great opportunity for profit taking. Once you catch a good trade and the market goes your way, you feel the buzz of trading. Through online platforms, this buzz has become so much easier to get access to. You can trade anywhere, from your phone, your office or at home.”

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Due to the size and international scope of the market, regulation has been a major challenge.  The retail category’s volumes are small relative to institutional players, however it has been the fastest growing over the last few years. The market is huge but it’s mainly interbank trading, treasuries and banks, and larger corporations covering their positions. In every cross-border business transaction there is a currency transaction; this is what creates those $5 trillion-a-day volumes. Due to the growth in the retail segment, thankfully, the regulators are implementing rules that make it a safer and more transparent environment for investors.

“Over the course of the last decade, forex has become more of an asset class than it was,” Najjar says. “Previously, it was only seen as a hedging tool but now it is traded like any other asset class. Nonetheless, the necessity to use forex positions to hedge against currency fluctuations in cross-border business deals will always remain, and continues to grow in line with globalisation.”

“Having said that, forex can still be risky because the market is open all hours and it’s very challenging,” he adds. “However, due to the nature of the liquidity, I am never stuck in a position in comparison to lesser liquid exchanges. In lesser liquid markets, if I’m holding a position and I can’t short sell that position I’m stuck with it because there are no buyers at the other end.”

The forex market has benefited in recent years by the explosion of the Middle Eastern equities bubble in 2005-6. Whereas investors once ignored the 50-percent gains that forex could offer, in lieu of the 300-400 percent gains they could win via the equities market, the benefits of a diversified portfolio have become more and more evident. That has opened the door for both forex and commodities trading.

But the industry has also been inextricably linked to worrying economic episodes. Hedge funds, in particular, have been criticised for speculation that has in some cases overwhelmed efforts by central banks to support currencies. Perhaps the most infamous example is that of George Soros, the billionaire financier who made ₤1bn by short-selling sterling during ‘Black Wednesday’, thus forcing the UK to withdraw the pound from the European Exchange Rate Mechanism.

Given the incredible amounts of liquidity hoarded by Gulf sovereign wealth funds, would it not be possible for them to disrupt currencies in the same way?

“The nature of the market has changed significantly over the last 20 years,” he says. “You are talking about $2 trillion a day being traded just on the euro. However much free liquidity they have, it is very challenging for them to take those positions and disrupt the currency.

“There is not one single global price for a currency. The standard deviations are minimal from bank to bank, however the prices major banks set are dependent on whatever each bank is holding of a currency; this is where basic supply and demand mechanisms determine the price of the currency. In our line of business, money laundering is controlled in the same manner as any other markets, and to everyone’s benefit, the world is tightening its grip on anti-money laundering; we, alongside all companies, abide by these tightening measures.”

In terms of the local economy, Najjar is a strong believer that Dubai is well on the path to recovery.

“Certain policies have taken place in Dubai to counteract the potential of a double-dip recession,” he points out. “So would I feel comfortable to invest in the economy now? Yes I would feel more comfortable about investing now than I would have done three years ago.”

In addition, Najjar also feels the local mindset is changing and maturing.

“I think the locals have started embedding business culture into their citizens at a much younger age,” he says. “Sheikh Mohammed has been involved in many initiatives for schools and universities in the region. I believe the vision is to build an infrastructure and to avoid the ‘paradox of plenty’, where lesser weight is given towards infrastructure and investment across all sectors due to the concentrated efforts on the short term gains of natural resources.”

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