TRADERS RIGGING CURRENCY RATES TO PROFIT FROM CLIENTS

 

A new scandal is hitting the largest world banks as details emerge of a scam to manipulate benchmark currency exchange rates to set the value of trillion-dollar investment trades, according to statements made by the exchange traders and dealers themselves.

They apparently do so by rigging rates as they push through trades in the 60 second windows when the benchmarks are set.  

The whistleblowers have said that the practice has been ongoing for more than a decade now, and it affects the value of hedge funds and derivatives.  

The Currency trade market is a 4.7 trillion a day market, the biggest in the global financial system.  What it entails is illegal profiteering by banks who profit from their own trades.  

Because most rates are not tracked by investors, the system is rife with the possibility of abuse.  And in the case of exchange rates, even a tiny fraction movement one way or the other can mean huge costs for the funds or client involved in the trade. 

Unfortunately, most of the traders might be beyond the legal reach of the authorities, since these kind of trades are not classified as financial instruments.  

This kind of activity furthermore 'robs' the financial systems of much needed funds.  Traders actually accomplish most of these trades by concentrating orders in the 60 seconds before currency rates are refreshed up or down for the following day cycle.   Some of the trades were in fact done this way to 'move the market' knowing that a client's trade could do so.  They claim this was done to save their employers', i.e., the banks' money. 

The 'moving of the market' is accomplished by shoving through all the client orders in the 60 second window before the new rate is pegged, thereby creation an upward pressure on the currency, because the currency rate is based on the median of the transactions for the currency 'day'.

Scrutiny and investigations of the activities of these traders however, will not probably result in any prosecution.  At most, the party that has been 'damaged' financially by such practices may bring suit.

Source : Bloomberg/  6.12.13