Are Bank Insiders Manipulating Foreign Exchange Rates, Too?

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Foreign currency traders are rigging the market in which they trade in order to bilk clients and maximize profits, five sources familiar with the practice told Bloomberg. The news extends an industry pattern of insider manipulation that includes oil markets and a key global interest rate.

Traders collude with one another to move exchange rates by concentrating specific types of transactions at specific times, the sources say. Since the banks are operating both for themselves and on behalf of clients, traders in on the rate rigging can suck huge amounts of money out of their own clients and into the firm’s grasp:

One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.

The market for foreign currency trading (FX) is massive, with $4.7 trillion in volume each day. While the mechanism for setting marketwide FX rates is theoretically less vulnerable to manipulation than the equivalent mechanisms in oil trading and inter-bank interest rates, Bloomberg explains, the market is dominated by just four of the world’s largest banks. The concentrated market share of Deutsche Bank, UBS, Barclays, and Citigroup make collusion both possible and profitable.

In May, a longstanding investigation into price rigging by oil traders culminated in raids of British Petroleum, Royal Dutch Shell, and Statoil offices in Europe. Oil price rigging has spillover effects for all other commodity prices, since shipping relies on fuel, and is especially distorting for food prices. Last year, an investigation revealed traders were manipulating something called the London Interbank Offer Rate, or LIBOR, which is a key driver of about $800 trillion worth of financial transactions the world over. LIBOR manipulation may have cost U.S. taxpayers billions at the federal level, and it was a major contributor to budget collapses and ensuing public service cuts in cities like Detroit and Baltimore.