A beginner's guide to Forex rigging

As the Bank of England gets embroiled in the foreign exchange-rigging scandal, MT tells you all you need to know about how to fiddle currencies.

by Rachel Savage
Last Updated: 12 Nov 2014

It’s the scandal that Financial Conduct Authority chief Martin Wheatley has described as ‘every bit as bad’ as the Libor-fixing furore, which has so far led to banks including RBS, Barclays and UBS being fined $6bn and ended the careers of top bankers like former Barclays boss Bob Diamond.
Now, the foreign exchange-rigging debacle is continuing to widen, showing no mercy for those who may-or-may-not have manipulated foreign exchange rates in London. This time, the Bank of England's good name is being dragged through the mud. If the Old Lady of Threadneedle Street isn’t immune to a bit of FX fiddling, who is?
The investigation into currency rate rigging has ensnared at least 15 banks, with nine (including all the UK’s major banks, plus Citigroup, JP Morgan and Deutsche Bank) suspending or firing a least 21 traders between them. Then, yesterday, the Bank of England dropped a shocker, announcing it had suspended a member of staff during its investigation into whether it had been involved.
The Bank, which trades currency to manage the UK’s FX reserves and hedge government departments’ FX risks, also published minutes of meetings officials held with City traders (some of whom were among the aforementioned 21 that got the chop) that suggested it knew of attempts to set currency exchange rates as long ago as July 2006.
Doesn’t look good, even though the guardian of the pound said  it had gone through an eye-watering 15,000 emails, 21,000 Bloomberg and Reuters chat-room records and more than 40 hours of telephone call recordings with a fine tooth comb as part of its internal review. It claimed it had ‘found no evidence that Bank of England staff colluded in any way in manipulating the foreign exchange market or in sharing confidential client information’.

So how would you go about fixing exchange rates? Look no further…

1. Be based in London

London is the largest FX hub in the world (being bang on Greenwich Mean Time is kinda helpful), with 41% of the $5.3tn (£3.17tn) currency traded globally every day flowing through the City, largely unregulated.

2. Work for Deutsche Bank, Citigroup, Barclays or UBS

You can obvs trade currency elsewhere, but these four banking big boys together account for 50% of the FX market, with Deutsche Bank at the top, sitting on a 15.2% market share.

3. Be a member of 'The Mafia'

Also known as 'The Cartel', this was a chat-room where the traders with the biggest egos and fattest order books allegedly colluded to set exchange rates. Next year’s X-Factor forgettables 'One Team, One Dream' or wannabe indie rockers 'The Bandits’ Club' were also apparently good for a fix.

4. Hammer the phones

With all the dollars and quids swirling around the City, someone’s got to pin down prices for them. Enter the WM/Reuters rate, which is the median of all currency transactions recorded in a 60-second window every hour. The poster child is the 4pm London close rate – every day fund managers use it to calculate their stashes, contracts are pegged at it and FTSE 100 and bond indices are computed with it.

More importantly for the wannabe fixer, companies and asset managers usually ask banks to buy or sell currencies at that rate. The FX market is unusually archaic, with trades still conducted by swaggering salesmen over the phone, meaning less transparency than if it was done electronically (although that didn't make Libor immune to rigging). Given the size of the FX market, orders need to be pretty hefty to sway the rate, even in a 60-second window (although if people are colluding the rate’s going to be simpler to set, especially if your client wants to change a less widely traded currency like the Mexican peso).

5. Get fixing

A customer tells you at 3.15pm they want to sell £1bn in exchange for euros at the 4pm closing rate. Heaven forbid you lose your bank money, so get selling pounds in the 60 second window – you’ll get a higher price and move the price down so you can buy them cheaper off your customer at the end of that manic minute. If you share it with The Cartel as well then everyone can sell-off pounds – win.

Tricks of the trade: a glossary

  • Painting the screen
    Not a Japanese art form, but indulging in some fake trading with your Mafiosi mates to get that rate going where you want.
  • Front-running
    Buying or selling up a currency before you place your client’s order, as above, so that you get the best price and they don’t.
  • Banging the close
    Traders probably do bang on their desks, in both senses of the word, but this version is chopping your client’s order up into as many small pieces as you can shove through the 60-second window. The WM/Reuters rate is based on the median of all transactions regardless of size, so more sales equals more sway over it.
  • Hunting for the stops
    Trading currencies so that exchange rates reach stop-losses – a point in a contract where something is automatically sold off so no more is lost.

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