Traders accused of rigging exchange rates

Hannah Langworth takes a look at claims that the currency markets have been manipulated

A number of regulatory bodies are currently investigating claims that the international forex (foreign exchange) markets have been illegally manipulated by traders.

A window of opportunity

UK financial services regulator the Financial Conduct Authority (FCA) announced last October that it was investigating claims that foreign exchange traders at a number of banks colluded to fix the prices of currencies and currency-related financial products.

It's alleged that traders dealing in these areas deliberately put certain currency transactions through trading systems during and around the 60-second windows when certain key currency exchange rates are set, allowing them to artificially affect these rates to benefit themselves or their clients.

Investigations into the international forex market are also underway in Europe, the US, and Asia, and it's even been alleged that Bank of England officials indirectly condoned currency manipulation. Forex traders at nine banks across the world have been suspended or have left their jobs, though in several cases it's claimed that these departures are not related to the forex market investigations.

Any investigations into the forex market are likely to hit the City particularly hard as it's the global centre for currency trading, accounting for nearly half of its worldwide turnover.

Pairing up

None of the forex market allegations have yet been proved, but William de Lucy, Managing Director of trading analysis and training firm Amplify Trading, thinks that some manipulation of the forex market by traders could certainly have happened.

"It would be almost impossible for a single institution to manipulate the main currency pairs due to the size and liquidity of these markets. However when you start looking at minor pairs and crosses such as the Argentine peso[/US dollar] then there is much more scope for profit from manipulation and therefore it is likely they do get manipulated," he says.

An investigation by a finance research firm into currency trading over six years found an "average quantum of manipulation" of between 0.12 and 0.16 per cent for the euro/US dollar pair and between 0.20 and 0.28 per cent for the Australian dollar/US dollar pair.

It might seem on first glance that this kind of manipulation of currency rates is just a matter of trading technicalities, but in fact it could have some very serious implications for the financial world, the economy in general, and even individual consumers.

The currency rates that it's alleged have been manipulated are used in many valuation processes in the City and across the world, so even a small shift in a rate could mean a significant gain or loss in the level of an important market and economic benchmark like the FTSE 100, or even a shift in the value of an individual's investment in a pension fund or savings account.

And, adds William, "market inefficiencies in this way ultimately make trades more expensive and therefore, as always, the biggest pain is felt by the end consumer."

All change?

The potential manipulation of the forex markets is not an isolated issue. Several banks have now been fined large sums for rigging Libor, a key interest rate benchmark, and there have also been investigations into price movements in the gas, oil, gold, and silver markets in recent years.

What's driving this string of similar incidents? William thinks that this type of activity is simply a natural consequence of the competitive nature of the financial world.

"It's a result of the fact that people try to use their ingenuity and enterprise to strengthen their financial position. This has always been the case and trying to impose unrealistic changes onto human behaviour is likely to be a messy process with misplaced red tape which may ultimately open up new loopholes," he says.

Others think the currently lightly-regulated forex market should be subject to more scrutiny in the future, as has happened in the once-opaque derivatives market, and traders and banks found to have participated in market manipulation should be dealt with firmly, as those found guilty of manipulating Libor have been.

With speculation swirling that this new scandal could be even bigger in scope and impact than the Libor affair, the forex market could be on the verge of a very significant shake-up.