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Forex scandal: What is that all about? Forex scandal: How to rig the market
(5 months later)
Yet another scandal is brewing in the City of London. The foreign exchange market is not easy to manipulate.
The authorities have been investigating suggestions that some foreign exchange traders have, for years, colluded to artificially fix foreign exchange rates. But it is still possible for traders to change the value of a currency in order to make a profit.
It comes just a couple of years after the sensational revelations about banks rigging the vital Libor interest rate. As it is a 24-hour market, it is not easy to see how much the market is worth on a given day.
And the Bank of England has been accused of knowing about it, but doing nothing - something it denies. Institutions find it useful to take a snapshot of how much is being bought and sold. This happens every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.
What is this "forex scandal"? The fix is very important, as it is the peg on which many other financial markets depend.
It is an apparent scandal involving, supposedly, the rigging of rates in the foreign exchange market. This is the so-called forex market in which banks and other financial businesses buy and sell currencies to each other. It is a massive market in which more than £3 trillion worth of currencies are traded globally every day, dwarfing the value of dealing on the stock market. About 40% of the world's dealing goes through trading rooms in London. So how do you make currency prices change in the way you want?
So who has done what? Traders can affect market prices by submitting a rush of orders during the window when the fix is set.
Forex traders at at least 10 UK and foreign banks, including Barclays and RBS, are being investigated to see if they colluded to set benchmark rates each day at 4pm. Although forex trading goes on 24 hours a day around the world, for the past 20 years or so a reference rate has been developed for use by corporate customers who want a simple, fair and transparent rate set for them each day. So manipulating it, if possible, could be very valuable indeed. This can skew the market's impression of supply and demand, so changing the price.
What has the Bank of England got to do with it? This might be where traders obtain confidential information about something that is about to happen and could change prices. For example, some traders shared internal information about their clients' orders and trading positions.
The Bank has been embarrassed by recent allegations that at least one of its senior officials actually knew this sort of thing was going on as far back as 2006 but did nothing to stop it, or did not realise it might be a bit fishy. One senior Bank official was recently suspended while the Bank makes its own enquiries. It is worth noting that the Bank does not oversee or regulate the forex market in the UK. But as one of its roles is to ensure the stability of the pound against other currencies it has its own dealing room and dealers who trade on the Bank's behalf. And the Bank keeps a close eye on what is going on - or should do. The traders could then place their own orders or sales in order to profit from the subsequent movement in prices.
How did this alleged rigging happen? This can relate to the 4pm fix, with a trader placing a trade before 4pm because he knows something will happen at around 4pm.
The suggestion is that dealers at several banks colluded over a number of years by using instant messaging systems and online chat rooms to discuss where it would be most favourable to set the day's benchmarks. A bit like the previous Libor scandal which has seen a host of banks fined hundreds of millions of pounds for wrong doing. It is easier to move prices if several market participants work together.
Libor scandal: Can we ever trust bankers again? By agreeing to place orders at a certain time or sharing confidential information, it is possible to move prices more sharply.
So what are the authorities doing? That could result in traders making more profits.
It emerged last autumn that the Financial Conduct Authority in the UK had been looking at these allegations since the early summer. It has been joined in an international investigation by counterparts in countries like the US, Switzerland and Hong Kong. No-one has been found guilty of anything yet, but a number of traders at a variety of banks have been suspended for the time being. Collusion can be "active", with traders speaking to each other on the phone or on internet chatrooms. It can also be "implicit", where traders don't need to speak to each other but are still aware of what other people in the market are planning to do.
The Chancellor announced proposals to make it a criminal offence to manipulate the foreign exchange, bond and commodity markets in his annual Mansion House speech. 'Hooray nice teamwork'
In doing so he will opt-out of a European directive, which is also due to make market manipulation a criminal offence but doesn't come into force until 2016. The UK's financial watchdog, the Financial Conduct Authority (FCA) gave some examples of how traders at banks calling themselves names such as "the players", "the 3 musketeers", "1 team, 1 dream" and "the A-team" attempted to manipulate foreign exchange markets.
The UK however has an opt-out when it comes to criminal justice matters, so can choose to ignore the relevant directive. In one example, it said traders at HSBC had colluded with traders from at least three other firms to attempt to drive the fix for the sterling-dollar rate lower.
Treasury sources said their own rules could be at least as tough as the directive or go even further. It said traders had shared confidential information about client orders prior to the fix, and then used this information to attempt to manipulate the fix downwards.
It is expected the new rules will be in place by the start of 2015. The sterling/dollar exchange rate fix fell from £1.6044 to £1.6009 in this particular example, making HSBC a $162,000 profit.
But isn't the forex market all about speculation? Afterwards, traders congratulated themselves, saying: "Loved that mate... worked lovely... pity we couldn't get it below the 00", "there you go.. go early, move it, hold it, push it", "nice works gents..I don my hat" and "Hooray nice teamwork".
Yes, the vast majority of trading has nothing to do with financing international trade, corporate deals or providing holidaymakers with foreign cash. Short-term and long-term speculation is what most trading is about. You might think that a bit of collusion to fiddle things would naturally be part and parcel of such a business. But it shouldn't be. Large corporate firms such as credit card companies that might use the 4pm rate could end up being cheated. In another example, the FCA said Citi traders had attempted to drive the euro/dollar fix upwards by sharing information on its buy orders with traders at other firms.
Traders at these firms then transferred their buy orders to Citi, giving it more influence on the market
Ultimately, the euro/dollar fix rose and Citi's profit for the trade reached $99,000.
After the trade was completed, traders shared congratulatory messages such as "lovely", "yeah worked ok" and "cn't teach that".
Who gets hurt?
The price movements arising from the manipulation are so small that holidaymakers are unlikely to notice a big difference when buying foreign currency.
The biggest losers are companies found guilty of manipulation. Even for big banks £2bn is a lot of money.
The regulators say that some of the banks' clients could have suffered from the market being skewed. That could affect the value of pension funds and investments.
This kind of manipulation also further undermines trust in the financial system, which has been through a series of scandals.