The FOREX market, also known as the currency market and the foreign exchange market, is actually the world’s most traded market. It is worth an astronomical $5.3 million! This market is essentially the place where currencies are traded; one currency is bought whilst another is sold. This is one of the most pivotal markets. From acquiring the right local currency for your next vacation to buying materials over the Internet, the FOREX market influences literally everyone, whether they realise it or not.
The main players in this industry are the large banking companies and recently news has revealed how some of these institutions have been gaming the global financial system in order to lock in better rates whilst trading in the FOREX market. Last month, both the US and British regulators revealed that a number of major banks had been using a unique tactic of building friendships via private chat rooms and such like, in order to coordinate the buying and selling of currency. By coordinating their efforts, they were able to shift currency prices in their favour and thus, have an influence on the foreign exchange market. So, how did FOREX turn into a ‘gaming zone’? Let’s find out…
So, the process begins with ‘making friends’. This term is being used very lightly, as those involved were essentially trusted colleagues from participating banks, as well as the currency traders. The UK Financial Conduct Authority states that the traders and the bank employees would meet in various online private chat rooms. The traders would give themselves different names, with two examples, being the ‘A Team’ and ‘the 3 musketeers’. They would then hold discussions about how to act together to cause a price shift in the FOREX market. They even discussed bringing new colleges into their circle. The US Commodity Futures Trading Commission says that one trader posed the following question to the rest of the chat group… ‘Is he gonna [sic] protect us… like we protect each other against our own branches?’
But the real gaming begins when it comes to coordinating movements in order to try and push the prices down. Once the clique has been formed between traders, one trader will instigate a movement. They will tell the rest when they are going to make a substantial sale or a large purchase in the foreign exchange market.
We can take a look at one HSBC trader’s approach to see the thought process behind everything in further clarity. One HSBC trader held a series of one-on-one conversations via a chat room, by which he informed others in the clique that he had to sell £400 million in the FOREX markets in exchange for US dollars. This equates to roughly $633 million, depending on the rate of exchange of course! Now, the HSBC trader wanted to make a profit obviously. So, he wanted to coordinate movement so that he could push down the price of the pound at 4pm UK time. Why 4pm? Well, this is when the global market rates are set. By pushing the price down, he would hurt his clients by artificially manufacturing a short-term decline in the pound.
So, did this move work? It most certainly did. Between 3.30 pm and 4.00 pm on the day in question, the value of the pound in relation to the dollar declined. At 4pm, as predicted, the HSBC trader sold £311 million. The other traders from his group also executed their trades and this helped to push the price down and ensure that it was thoroughly depressed. Was it worth the hassle? Regulators have revealed that the HSBC trader in question earned about £100,000 for this sneaky strategy, so we’re sure he or she definitely thinks it was worth the trouble.
And, if you take a look at their chat room conversation afterwards, you will certainly see that the traders and bank colleges were proud of themselves. They met to send each other congratulatory message, such as ‘hooray, nice work team’ and ‘nice work gents’. One member even exclaimed that if they had a few more moves like this throughout the month then it would allow him to get back on track, hinting at how regular stunts like this were being pulled.
You may be reading this and be feeling slightly frustrated. It’s a sly move to make isn’t it? Well, the good news is that the regulators evidently caught on in the US and the UK. As a result, six major banks, including HSBC of course, were fined. They received a fine in excess of $4 billion for their participation in the illicit trading scheme. The bad news doesn’t end there for the participants either. Individual employees, as well as the banks on a whole, could find themselves facing criminal charges both in the US and the UK over their attempts to manipulate rates on the foreign exchange market.
Overall, it is quite spectacular to think that through the use of building friendships and using online chat rooms, traders and colleges were able to formulate a strategy whereby they would have such a massive influence on the world’s most traded market. It’s vital to take that into consideration – FOREX is the most traded on a global scale, and thus to influence prices in such a manner is truly startling. However, this exploitation of not only the market but also individuals – such as clients is wholly unlawful, which is why participants have been met with such high fines and potentially even worse repercussions.
The FOREX market is of course not the easiest to regulate, this is especially the case when you take into consideration that it is the largest and most liquid market on a global scale. There is no one single body in police to regulate this market either, which a lot of people see as a concern. Spot FX is not regulated and this accounts for about 95 per cent of the majority of currency trading. However, future trades and options in FX are regulated as derivatives through various bodies, such as those mentioned in this post – like the CFTC, Commodities Futures Trading Commission. And while there may be concerns, at least this post can serve as proof that it’s not so easy to get away with manipulation of the market.