Forex Rate Rigging Proves Trading Is For Insiders

The WealthCycles Staff

In the summer of 2012, reports surfaced that a group of bank traders had conspired to manipulate the LIBOR (London Interbank Offered Rate), a benchmark rate used to set interest rates and calculate value in millions of financial contracts all over the world. As it turns out, the LIBOR racket was only the tip of the iceberg. The scandal and ensuing investigations have unearthed a whole closetful of benchmark-rigging schemes—a fraction of a point of change to which can take money from the pockets of retired pensioners or raise the interest rates on home loans.

The latest twist on the rate-fixing scam is the collusion of foreign exchange traders to manipulate what is known as the “4 p.m. fix,” according to a Dec. 19 report.

This is the closing “fix,” the thin slice of the day when foreign-exchange traders buy and sell billions of dollars of currency in the largely unregulated $5.3-trillion-a-day foreign-exchange market, the biggest in the world by volume, according to the Bank for International Settlements. Their trades help set the benchmark WM/Reuters rates used to value more than $3.6 trillion of index funds held by pension holders, savers and money managers around the world.

In the LIBOR-fixing fraud, a small group of traders from the world’s largest banks conspired via e-mail to misreport their bank’s interest rates in order to push the LIBOR up or down—for personal gain. In the WM/Reuters rate scam, a small, elite group of foreign exchange traders from the world’s largest banks used a Bloomberg instant message platform to keep one another informed of their impending trades, trading ahead of the 4 p.m. cut-off in order to push the daily benchmark up or down—for personal gain.

The Bloomberg report blew the lid off the scam, and a succession of banks, including JP Morgan Chase, Royal Bank of Scotland Group, Lloyds Banking Group, Deutsche Bank AG and, most recently, Goldman Sachs, have opened their own investigations. All have banned their traders from using multi-bank chatrooms, according to a Dec. 20 Bloomberg report, although traders “will still be allowed to communicate one-on-one with dealers at other firms to discuss business.”

Banks are clamping down on traders’ use of chat rooms after regulators used them as evidence in their investigations into the manipulation of benchmark interest rates and foreign-exchange rates.

The revelation of the multiple benchmark-rigging scams, likely to continue with the discovery of even worse abuses for the foreseeable future, exposes a troubling reality about how the financial system is operated, and for whose benefit, Bloomberg reports.

At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia,” in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.

Spot foreign exchange trades are not regulated in the same way that sales of foreign exchange derivatives, stocks and bonds are: “spot foreign exchange—the buying and selling for immediate delivery as opposed to some future date—isn’t considered an investment product and isn’t subject to specific rules.”

A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.
“If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior,” said Abrantes-Metz, whose 2008 paper “Libor Manipulation” helped spark a global probe of interbank borrowing rates. “Even a little bit of difference in price can add up to big profits.”  

As with the LIBOR investigation, the disclosure that the largest foreign exchange traders in the world brazenly skewed the markets to their benefit is discouraging, reinforcing the already growing public perception that markets are controlled by and for the “haves,” the market insiders, and too bad for the individual investors, importers/exporters, and the companies that have to purchase foreign currencies in order to do business.

But even though spot foreign exchange trade resides in a regulatory no-man’s-land, it is subject to laws against insider trading, epitomized by the FX chatroom scandal. It will be interesting as investigations proceed to see if anyone goes to jail for this thievery, or if their bank employers will merely pay a few fines representing a day or two’s worth of profit and go back to business as usual. At the least we can hope the unwanted publicity will inspire them to do a better job of hiding their larceny from the rest of us.

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