The murky side of retail forex

In these days of heightened regulatory scrutiny, Saxo Bank could take it upon itself as a pioneer of the retail foreign exchange market to more effectively monitor who is using its technology and how.

A group of UK and Middle East-based retail investors in Knight Wazir have formed a pressure group working to recoup about £25 million they believe has been misappropriated. The owner of Knight Wazir, Atif Naz, has disappeared and his investors do not know what has happened to their funds. They fear Knight Wazir was operating at a loss for many months, or even years.

Knight Wazir was a trading account customer of Dubai-based broker Quest Financial Consulting, which in turn is a white-label partner of Saxo Bank.

The obvious next step is for Quest Financial and Saxo Bank to do some data mining to work out what happened and how. After all, Saxo says its business model is based on facilitation, partnership and transparency.

As a technology vendor and liquidity aggregator, Saxo should want to know who is using its technology and what risk controls are in place. If it chooses to pass this responsibility on to its partner, it should ensure the same standards are being applied, and what action it will take if they are breached. My understanding is that Quest’s relationship with Saxo has not been affected by this incident, despite news of large losses at Knight Wazir emerging in May.

To be clear, neither Saxo nor Quest are under any legal obligation to act here, and ultimately it’s up to investors to carefully assess where to make investments. But perhaps standards should be set higher.

Indeed, Saxo has not been linked to this kind of situation before to my knowledge, and could use this as an opportunity to set a precedent of how the retail FX market should behave in dealings with the wholesale FX market. It should use its experience to set best practice for retail trading companies, or introduce measures that prevents this occurring again, at least at its own partners.

It might want to re-evaluate its relationship with Quest. Knight Wazir never looked squeaky clean. The company was initially registered in the UK but then moved to Dubai while being incorporated in Panama, and its dubious operations have been discussed heavily in forums since May.

Incidents such as this do not call for regulation, they call for a more proactive approach by those with experience of operating in the wholesale market passing on some wisdom. At the end of the day, the FX market has been successful without regulation to date, so if newcomers want to come in, they should learn the unwritten rules of the game.

It’s an industry issue not a regulatory one, although the US model, where only FX dealer members can hold client funds and introducing brokers cannot, might be relevant.

Saxo Bank says it does not comment on partners and Quest did not respond to enquiries.