The Thin Red Line Of Foreign Exchange Rigging

This post was written for, a site targeting high net worth individuals in Singapore.

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The first thing that strikes anyone visiting a dealing room for the first time back in the old days was the noise from the intercoms between desks and broker boxes blasting endless streams of prices. For those who could not wait for the intercom, they would yell across the room for attention.

When one gets used to the noise, for it was mostly noise unless it mattered to you, one would realise that most of the activity came from the forex (FX) trading desk – the loudest and most colourful of the desks with their flashing EBS screens updating prices by the seconds.


FX traders are an entirely different breed and have always struck me with a little awe, sitting there in rapt attention to the flickering screens and ears shut to the world but for the “noise” that mattered to them. Reacting like automated machines buying and selling, managing their constantly changing positions that result from client flows and their trades.

I have always worked with the FX desks throughout my career, starting out on the FX forwards, a derivative of FX and short term interest rates (up to 12 months), and in my bonds and interest rate derivatives days, I was trading FX within my proprietary trading limits, using FX as a hedge or in pricing currency swaps and so on.

All I can say is that the seemingly easiest product is the hardest to trade. With minimal math involved, you can go by anything from economic data releases to infinite charting and graphical possibilities to even astrology that some swear by.

Trillions exchanging hands daily with the numbers growing as daily turnover increased to $5.3 trillion USD a day in 2013 from $ 4 trillion in 2010. The USD remains the unchallenged currency of the world with 87% market share daily, referring to the Bank of International Settlements Triennial Survey.

It has been estimated that 99% of daily turnover is the result of speculative activity which means that the FX market is the undisputed casino of the world.

Why ?

Because FX is a zero sum game. FX is not an asset. It is just the relative value of one currency against another. When one executes a trade, there is a counterparty that takes the opposite position and thousands of trades are being conducted every minute of the day from 5 a.m. Monday morning when New Zealand opens to 5 a.m. Saturday (SG time)  when New York closes.

On such a scale of activity and volume, the industry axiom is that FX is impossible to manipulate or control in any way and how shaken are we (or not) that the Department of Justice and the Federal Reserve will be taking action on 6 banks for their roles in rigging the FX markets.

So far, we have had banks netted for rigging LIBOR, cheating on sub prime mortgages, found guilty for misconduct in ABS (asset back securities) sales, an overhaul of the gold and silver fixing last year and, separately, a gold and silver market rigging scandal exposed in Dubai earlier this month. This does not include all the stock rigging and insider trading scandals that we get on an almost daily basis.

It is easy to understand how LIBOR could have been rigged because of the way fixing was managed, via a select group of traders who are known to each other. It is easier to understand how ABS could have been manipulated because the pricing of bonds and securities are not available to all and sometimes run on complicated valuation models that even regulators find difficult to understand.

I have always thought it was easy to cheat at FX from the start, in my hazy almost dream-like recollections of the old days, because I am not prepared to take any oaths on any stands for saying this.

Imagine a scene where a desk of traders get together and compare the list of stop-loss and take-profits levels left by clients each day. Privy information that is not known to most of the world. Imagine if you shared this information with a friend from another bank who would return the favour with their lists ? Is that rigging ?

And yet, that would never be proven because records do not date back so far to days where phone recordings were patchy and mobile phones were allowed in the dealing room.

To continue reading ……


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