Are the Currency Markets Fair? Or Are The Banks Fooling Us?

Currency rate manipulation: Bloomberg
Is the FX market rigged? Source Bloomberg © forexop

Barclays is the latest bank to suspend traders in an alleged “massive” foreign exchange rate rigging scandal that involves manipulation of the daily closing fixes. This follows suspensions of two traders at RBS (Royal Bank of Scotland) yesterday.

Earlier in the month an inquiry was launched into whether Swiss traders were involved in manipulation of the 4.00 p.m. London closing fix – or WM/Reuters rates.

The investigation seems to be growing with reports that several banks are now being sued.

Just as with the Libor fixing scandal, manipulation of the benchmark currency fixes has far wider implications than foreign exchange alone.

These fixings are used to determine “next day” dealing rates for the bank’s customers, for settlement rates for a whole menagerie of forex derivatives, as well as dozens of other financial instruments that track foreign exchange benchmarks.

The ability to move the closing currency rates, even by a few points, could be monumentally significant. It could be used to “swing” the settlement outcomes of billions of dollars worth of derivatives contracts and other products.

This could potentially allow the bank’s to make enormous “illegal profits”. Not to mention, the potential to profit from orders of ordinary customers.

Bloomberg reported earlier in the year their concerns that currency traders were “messaging” each other specific details about their positions – and in unusual spikes around the time of the daily fixings.

In my view, this news can only fuel doubts about the integrity of the currency markets. At present these are only allegations. However I’ll be keeping a close eye on developments, and writing about them here on forexop.

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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

1 Comment
  1. This doesn’t surprise me at all to be honest. I worked in the back office of a global bank where I was booking settlements for all of the foreign exchange transactions. These could be those that arose from share or bonds trades in a different currency to the client’s own account and so there’s a foreign exchange transaction involved. It seemed strange that the daily booking rates always seem to fix at levels most beneficial to the bank. I have no proof of anything going on just my experience.

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