Actions Speaking Volume

Master Capital Group Expanding the FX Trade


I’m never late to a meeting, but the Beirut traffic that day was horrific. Having burned more gas in idle – at the cost of $4/hour – than making progress towards my destination and appointment with Henri Chaoul, CEO of Master Capital Group (MCG), I finally decided to make a run for it, throwing my keys to a bewildered parking attendant some marathon away. When I arrived 20 minutes behind schedule and 6 months out of shape, Chaoul and his team were busy maneuvering their way through online traffic of some $4 billion in trading volume muscle. Sure made my little run in with congestion look trivial in comparison.

“The starting point of the journey was in 2009 launching as purely an FX broker, and today we are a financial institution licensed to operate as a financial dealer/broker,” began Chaoul, taking a brief personal respite from his information superhighway dealings. MCG recently started managing operations for Dubai and is in the process of getting the license for Cyprus, now that it became a fully-fledged broker, doing spot FX, CFD (contract for differences using cash rather than goods settlements on futures deals), fixed income, and futures. At the end of the first quarter of 2012, MCG added equities trading to the futures platform as part of its expansion on Over the Counter and On Exchange products. MCG is getting the license in Cyprus for 3 main reasons:

1)   Geopolitical plan B- Cyprus is safe from regional tension

2)   Lebanon’s financial pressures from the West. Business needs to be ready for all unknowns

3)   Access to customers beyond the ME and Africa. Cyprus will add to the credibility


However product suite and operational expansion is only part of the diversification process. “When we started in 2009, we were mostly on the retail end, but early on this year, we started on the institutional market, mainly on three products. FX, Futures and fixed income markets,” announced Chaoul. MCG does business under the proprietary brand FXCM MENA, offering traders in the region all the benefits of FXCM’s industry experience, size, financial strength and trading execution, but with local advantages such as language support in Arabic, English & French, local regulations and local deposits & wire transfers. Via FXCM MENA, MCG can provide futures with a clearer like Mizuho Securities who is a global Futures Commission Merchant (FCM) providing institutional and corporate clients with efficient and cost effective access to commodity and financial markets around the world.

After the MF Global calamity, a lot of institutions in the region are now looking at dissecting and desegregating their futures’ holdings with a number of providers. So there is a big hole to be filled and FXCM, with its very strong balance sheet can provide that assurance.

MF Global was a major global financial derivatives broker and also a primary dealer in United States Treasury securities. In October, 2011, MF Global Inc., filed the eighth-largest U.S. bankruptcy, after reporting the shortfall in customer accounts at $891,465,650.

The FX platform is the key behind MCG’s growing network of online trading services. Forex is a very volatile market. The sheer number of currencies traded serves to ensure a rather extreme level of volatility on a day-to-day basis, with opportunities for profit and risk of loss. Yet, like the equity markets, Forex offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. Currently, about $4 trillion in notional volume is being traded every day in FX, where spreads are extremely tight, and leverage is extremely high. “In 2008, when we checked what kind of operations FXCM had in the ME, we told them the potential would be larger had you come and been physically present there and as soon as we opened the office, people began trickling in, saying ‘finally someone who can speak our language’,” explained Chaoul. With local deposits replacing transferring money abroad, investors in FX could easily meet margin calls and withdraw money, making forex trading more attractive. “We quadrupled whatever volume FXCM had in the region within 18 months of operations. Today we are at a stable $4-5 billion notional volume a month. And we can double or triple that volume especially if we add the institutional market,” added Chaoul

The platforms that MCG provides to institutions are different than the one retail clients have access to, allowing those institutions to click and see the depth of the market, and watch who is bidding and offering at different levels. The institutional market, though it will add volume to MCG’s business, is less profitable because an institution will ultimately make money on the retail.  “Typically, the spread on Euro/Dollar that you show to a retail customer is anywhere from 2 to 2.5 pips, which is standard in the industry today but to an institution, you have to show 1 pip,” explained Chaoul. A pip is the smallest price change that a given exchange rate can make. For most currency pairs this is the equivalent of 1/100 of one percent, or one basis point.

Of the total volume being exchanged, a portion is attributed to people wanting to exchange currency while travelling, while another is when commercial traders with contracts in a particular commodity or metal want to hedge their position against changes in prices. “But the majority are speculators and investors who see a trend, want to ride it and make money,” said Chaoul. What helps trading is volatility because if prices don’t change much, there is no opportunity for gains, while investments, hedging and volumes all decrease. “Everything is linked to uncertainty. From 2008 until 2011, we have been ‘blessed’ with volatility. In 2012, it was high in Jan and Feb, but in March, we were at the lowest volatility since the crisis. I hope the volatility index will come up with something to trigger volatility in the market,” hoped Chaoul. In March 2012, the European leadership and ECB started making strong decisions regarding the euro zone’s sovereign debt crisis and decided to dump large sums of money creating a positive chock to the financial system and resulting in more stability.

Governments have not yet been a target of MCG but this is about to change. “We do believe that central banks ought to be interested in, at the very least, the fixed income offering that we have and additionally sovereign wealth funds (SWFs) are a tremendous opportunity considering the liquid amounts involved and I heard that there is going to be one created in Lebanon to place all the resources we get from oil and gas exploration and which will be earmarked to reduce public debt and provide resources for future generations,” offered Chaoul. Already the ADIA in the UAE, the KIA in Kuwait and QIA in Qatar, among other SWFs, do substantial trading, but mostly not through broker/traders like MCG.

MCG now sees an opportunity to expand into equities trading in mostly US and European markets. “In 2009, no one wanted to touch equities. To make $2-$3 on a trade was not worth doing. The impact of the crisis is dissolving from the mindset of people, so the US equities market is back up to a figure of 30% more in the first quarter this year,” said Chaoul. US job figures bolster this fact. The US has created 200,000 jobs a month, every month in the last quarter, keeping a steady rate of unemployment at about 8% unemployment, whereas in Europe the figure is closer to 11%.

“I don’t think we have a recession problem, but rather financial deleveraging and that takes time to get out of the system,” opined Chaoul. He added that as credit lines dry out and people refrain from getting into debt, the long-term solution lies in increasing public spending through quantitative easing (QE). “The US has got it right very quickly. It said look: ‘All the undue risk that was taken by banks is a reality. So do I stay in a corner and lick my wounds or do I fix the problem? They tried reducing interest rates to 25 basis points in the US and 50 in Europe and ended up in a liquidity trap. The only way out was to let the Central Bank expand its balance sheet. They did that and will keep on doing it until they bring the economy out of it. Ultimately, these QEs, all that money in the economy, will have to be set back and it will take years,” described Chaoul.

MCG is bringing to the region the best of western technology in online trading for forex, futures and equities trading but also for fixed income with “No one has the ability to trade fixed income electronically in an anonymous manner with tradable executable prices,” claims Chaoul. Typically, prices are indicative prices where you have to call your broker who has to find it and if not you go somewhere else and so on. “With us, it’s all on one platform. You click and trade. We like to think that this is our added value in the region because we are doing the same things in equities and futures,” said Chaoul. MCG is working with a company called Victor Securities, an execution broker that will allow account holders of less than $5 million, which banks would reject, to be served.

But what if you have capital and don’t know what to do with it? As Broker/Dealers, MCG doesn’t manage money or give advice, but the group has set up a trade facilitation desk which people can call and ask questions about what’s happening in the market; they also educate retail customers through free seminars held at their offices in Beirut and the region. MCG prints economic calendars, gives all the risk disclosures and notices required, and tries its best to give investors the tools they need but can’t force feed them to the retail customer. At the end of the day, if someone wants to speculate, invest, hedge or trade on a one to one basis, then MCG will accommodate any or all these requests. “When people ask me ‘if you have one piece of advice on how to make money on FX, what would it be? Research? Technology? Access?’ I say: ‘The answer is leverage. Take less leverage and you can sustain market volatility more and more,” said Chaoul adding “Our motto is trade responsibly.”

Box: Trends and insights

Henri Chaoul, General Manager of MCG gives his take on trading and associated trends. “We are not in the business of predicting what’s going to happen to currencies or futures. Following the monetary crisis, people wanted a safe haven expressed in terms of Swiss Francs, gold, and more so in terms of physical gold. Everything about what was produced in gold since the Roman Empire, from your tooth fillings to stockpiles in Credit Suisse or UBS, is still on the face of the earth, unlike silver. What can people do with money in bank accounts? Earn 25 basis points for it which inflation will quickly depreciate? Gold is becoming a currency, because the value of money, even with interest a year from now, will be less. So yes, I see gold reaching $2200 an ounce.”

As for online trading, Chaoul added that it was definitely growing. “As the penetration of the internet grows –we are not like Iceland where 97% penetration rates exist – there is huge potential. We don’t yet have in Lebanon the trend of advertisers showing up on your mobile phone as you enter malls and window shop by retailers, but the digital world is growing from and to any place,” said Chaoul. But is it safe to trade online? “If you have a bad connection and are trying to do high frequency trading, then I would highly discourage the practice. But if you are an opportunistic trader, then yes. Safety is as good as your connection is. The latency of the connection is much better in Lebanon and we’ve never had a single problem of hacking.”

Chaoul went on to briefly talk about the Euro Zone crisis. “It is not over. There is something completely dysfunctional; a disconnection between monetary and fiscal policy, government vs. the Central Bank. Europe is where any future crisis could come from, not North America.”

About the Author

Henri Chaoul, PhD, is General Manager of Master Capital Group S.A.L.  Dr. Chaoul is currently based in Beirut.  He has more than six years of Investment Banking experience and more than twelve years of consulting experience in Europe, Asia, North America and the Middle East covering an array of industries including postal services, computer, information systems, automotive, retail and luxury, pharmaceutical, medical equipment and transportation.  Dr. Chaoul has consulted on private equity, investment banking, as well as mergers and acquisitions.


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