Fixing the FX Market Fixers

Currency Trading and Manipulated Markets

Written by Brett Chatz, Intertrader

$5 Trillion a Day with Insider Trading?

The recent punitive measures taken against several multinational banks have drawn attention to price fixing in the currency markets.

Global Collusion Uncovered in FX Markets

Manipulation of the global financial markets is something eschewed by the world’s regulatory authorities and financial oversight committees. Yet, in spite of abhorrence to these unlawful practices this type of misconduct takes place all the time. Just recently, at least 7 international banking institutions were slapped with billions of dollars in penalties for such practices. The total punitive charges levelled against these banks exceeded $10.3 billion. The penalties were slapped on the banks for joint manipulation of currency markets, price fixing and bid rigging too.

The global currency market is worth an estimated $5 trillion daily and this makes it the biggest decentralised market in the world. While it is a global market, it is largely located in London and New York. At no point in the history of global currency trading was there much talk of collusion, but that changed in 2006. The reasons this was never a factor was the real-time trading of the markets and the transparency in forex rates. Since so many banks are involved, it becomes very difficult (impossible) for any single entity to influence the markets in a substantial way. There are also the thin margins enjoyed by forex traders.

Citicorp Collusion Nets $412 Million in Profits

The absence of supervision by government authorities was notable and banks only reported daily benchmark rates. It must be borne in mind that forex trading generates substantial revenues for banks. In the 6-year spell between 2008 and 2014 forex revenues from ten of the world’s largest banks amounted to as much as $22 billion per annum. Collusion became possible because several of the biggest banks control so much of the market, and working together for their common interests became a priority. Citicorp admitted to wrongdoing and made profits in the region of $412 million at minimum. That figure is substantial, but it pales in comparison to the $1.2 billion generated by the owners of the largest banks. The cartel disempowered traders in the FX markets since they rigged the market.

How Did Collusion Take Place with Currency Traders at Big Banks?

It’s all a numbers game with forex trading. The smallest manipulation of rates at huge volumes can generate substantial profits. A select group of traders at big banks work to manipulate forex rates by taking large positions. These positions are far greater than what is required for their traders’ currency needs. This was followed in part by collusion with groups of traders (real-time messaging/texting) in chat rooms in the 60 seconds that forex rates were being fixed. This would allow traders to get a fix on trading volumes and profit accordingly.

UBS of Switzerland tried to gain leniency from the United Kingdom, United States and various authorities for its forex malfeasance. Criminal probes have since been opened all over the world, various high level forex traders have been dismissed and criminal charges are being filed. 11 civil penalties have been levelled against 6 banks by Swiss, U.K. and U.S. regulatory authorities. The penalties total $4.33 billion and the banks include: HSBC, RBS, Bank of America, JPMorgan and Citicorp. Many of these banks have been in closed-door discussions with the US DOJ about price-fixing and criminal conduct. Even Barclays Bank is being investigated for its part in price-fixing. All of these banks must now face civil and criminal charges for their role in manipulating the currency markets.

Ways of Reducing Collusion in the Currency Markets

It is evident from the structure of global currency trading that a handful of the biggest banks in the world are powerful enough to rig the system in their favour. This gives credence to the concerns shared by traders and regulators. As it stands, the loopholes that are evident are significant enough to allow for price fixing and manipulation. As long as these ‘chat rooms’ between traders are closed currency markets will be harder to manipulate. A culture of ‘If you ain’t cheating, you ain’t trying‘ was the mantra of big banks like Barclays where price-fixing was rife. This distortion is likely to continue in some fashion or other, but further decentralisation of currency trading is clearly the solution to price manipulation.

Previously, there was a 4pm fix in London and there was a 30 second window (now it is 5 minutes) where institutions could take a snapshot of the market. This price fix is an important yardstick in currency trading. Other financial institutions use this fix when taking orders. Traders can then place orders before an event, knowing that an event will take place later that day. The price increase ensures that the trader will generate a profit. It must always be remembered that individual trades do not impact a currency’s value. However, trades placed simultaneously (collusion) have a large impact on market prices. When traders place orders at specific times, it is possible for prices to move sharply. The objective therefore is more regulation, accountability and decentralization of currency trading.