FX traders are gaming the system. Who knew?
A Bloomberg story reports that traders in the $4.7 trillion-a-day foreign-exchange market are manipulating their transactions in order to maximize their personal profits. Sometimes they’re front-running client orders; sometimes they’re breaking trades up in order to alter the daily “closing” price. In many cases they’re chatting online with their buddies at other banks so they can all profit.
This latest episode of market manipulation comes on the heels of the LIBOR scandal. Ironically, it’s unclear if any crime has been committed, since foreign exchange isn’t a financial instrument and by its very nature is cross-border. But it’s an essential function of international banking. Global trade and investment couldn’t happen without deep and liquid currency markets.
The forex market never really closes, but the process of calculating daily rates for global settlement is automated and open, so major players know just what to do to push the price around. Sometimes, that can result in hundreds of thousands in profits from one large trade–profits that come at the client’s expense, and accrue to the trader’s bonus.
These traders are compromising the market’s integrity for their personal gain. They don’t deserve to be in finance.
Douglas R. Tengdin, CFA
Chief Investment Officer