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Sun 15 Oct 2006 04:00 AM

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Glimpse into the futures

Currency futures trading is no longer the exclusive domain of banks and large financial institutions, with small investors cashing in. Alexandra Dubsky reports.

|~|116046-200.jpg|~|CASH RICH: Careful investment can see a return of up to 700% in a short space of time.|~|Currency futures trading is no longer the exclusive domain of banks and large financial institutions, with small investors cashing in. Alexandra Dubsky reports.Ahmed Khan is a graphic designer, but right now he has little interest in his day job. In fact, later this week he will resign – but with a big smile on his face.

“In one year from now, when I celebrate my 40th birthday, I will hopefully celebrate my first million as well,” he says.

Khan (real name withheld) is one of a growing number of ‘new breed’ traders. Fed up with near 60% falls on the region’s stock markets since the turn of the year, they have joined the currency futures trading bandwagon. It is a big game with big risks. Returns of 40% are not beyond reality – but so are staggering losses.

Khan, though, is convinced he is doing the right thing. “I make at least five times my original salary, I have so far doubled my salary every week. I guess there are only 5% of all investors that really make money, because people do not really study the market closely enough,” he says.

He is not alone in pursuing his millions on the foreign exchange market (Forex). The Forex is now the most actively traded market in the world, with a daily trading volume of US$1.5 trillion - around 75 times greater than the New York Stock Exchange. And the market can hardly be moved by big individual traders - a phenomenon often seen in GCC stock markets where single big-shot investors dominate the bourse, and shift share values randomly.

Another attraction is that the currency market is open for 24 hours; hence trading is possible at any time and place. It is a truly global market, with high liquidity and high level of leverage. Since it is the biggest market worldwide, traders can exit the field at their will in any market condition. The market is also always a bull market, since if the value of one currency goes down, another one goes up - so there is always money to be made by the canny investor.

However, the risk factor of currency trading is by nature relatively high. Under normal conditions the bid/ask spread is less than 0.1%, a so-called ‘10 pips’. In the case of larger deals, the spread could be smaller and may expand a lot in fast-moving markets.

“The main problem with currency trading is that people get greedy. It is always advisable to hold your account for a year, and to invest only around 10% of your portfolio to let the rest keep you in the market in case you make losses,” says Iskandar Al-Najjar, Head of Retails Sales, at ACM online brokerage in Dubai.

Although currency trading has its roots back in the 1970s, when the gold standard was abandoned in favour of a free floating economy, it was then used exclusively by banks, financial institutions and high net-worth individuals. Margins used to be higher, and the trading companies charged higher rates.

Since 1995, however, with the rise of the internet, currency trading has been main streamed and gained popularity with investors who prefer it as an investment alternative to the traditional stock market. The investment ratio is 1:100, and once the investor loses all his money his portfolio gets erased. ROI levels can reach up to 400%, but at medium-to-lower risk operations they are between 5%-10%, depending on the length and kind of trading. Al-Najjar explains: “The market is even more volatile than the stock market or commodities. Only a well-balanced, educated mix of technical and fundamental analysis will work for traders, but it really needs a lot of experience to read the market well. You can either end up owning a yacht or you lose all your assets, so you need to watch out to stay at the right side of the game.”

He adds: “We had a client who made 700% of his capital in six weeks, but two months after that he lost everything. Aggressive operations can work at times, but if they go wrong it’s deadly.”

So just how widespread is currency trading? According to US consultancy firm Greenwich Associates, growth rates among retail traders are now running at 60% a year. Even though the central banks, commercial banks, multinational corporations, and hedge funds still make up most of the US$1.7 trillion daily trade, several billion dollars’ worth of trades are made by ordinary investors.

ACM markets last year introduced Islamic accounts for the region, with removed interest rates for their Arab clients. “Around 90% of our accounts are now Islamic ones. They are very popular not only with our regional investors, but also in the UK where clients have started to ask for them. We will soon introduce them to our international products,” says Al-Najjar. “Most of our customers are from the Middle East. They prefer to deal with a gulf-based platform, since their assets abroad can be frozen at any time these days,” he adds.

When the Dubai Gold and Commodities Exchange (DGCX) introduced currency options to its investment products this summer, over US$7m of trades were made on the first day alone. And that figure has only continued to rise.

“Traders from all over the world trade at the exchange in Dubai,” he says. “Traders seek arbitrate opportunities. A US or Asian investor trades here because of the assets’ different delivery points. Gold, for example, has a different value here than in Bombay, since it is traded there in Indian rupees. The same theory applies to currencies. Local investors mainly prefer trading in Dubai because of tax incentives, and the fact that it allows them to keep their money in the region,” says Floyd.

And it would appear that the currency markets will only keep rising. The largest non-banking futures broker in the world, Man Financial, recently moved to the Middle East just so as to capitalise on the growing market. Middle East General Manager Rajiv Kumar says: “People have been trading currencies in the Middle East before, but using the American markets. Now the DGCX has added currency futures to its range of products, obviously there is great interest. The trades we are seeing are small in size but high in volume.”

He adds: “I think it will keep on growing. When derivatives were first introduced in India in 2000, everyone thought it would be too complex. Now it is a huge success. I have no doubt we will see the same in the Middle East. As far as I’m concerned, this is a plus situation for everyone concerned.”

Ahmed Khan is optimistic; he knows he will do well to make his first million before he hits the ripe age of 40. He believes in the benefits. On the other hand, who knows what the futures hold?||**||

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