“The fix is in.”
This usually means someone is cheating. In sports, one or more players agree to fail, or at least to let the other side look good. In finance, though, “the fix” often refers to the determination of a certain price on a financial instrument at a certain time. Global markets calculate a “fix” on interest rates, precious metals prices, and foreign exchange at 4 pm London time. This pricing convention may also be referred to in swap contracts worth trillions of dollars.
It turns out that the “London fix” has often been more like sports betting than the competitive pricing of financial instruments. Yesterday five banks pled guilty to criminal charges and agreed to pay $5.7 billion in fines for rigging the foreign exchange markets. Their traders were colluding on electronic chatrooms, sharing information about customer orders and cooperatively manipulating markets to get favorable “fixes.” In this way they boosted trading profits and enhanced their bonuses. The fraud may have cost clients upward of $7 billion, probably a lot more.
The exclusive chat rooms had a locker-room atmosphere. Traders called themselves “The Bandits’ Club” or “The Mafia.” Business was interspersed with jokes about alcohol, drugs, and women. And it wasn’t just rogue traders. Some of the conspirators headed up their banks’ forex desks and were members of the Bank of England’s chief dealers group. Hundreds of traders around the world could be implicated.
Part of this stems from a texting, trading culture that has built up around the Reuters foreign exchange terminal. Reuters terminals are widely used in currency dealing. They are a global network that has been around since the late ‘80s. Traders could use them to text one another from Tokyo to Frankfurt to New York. It was pretty innovative back then. It’s natural that their conversations would migrate from official terminals to uncontrolled chatrooms.
But part of this comes from a natural human tendency to seek some kind of advantage. Adam Smith observed this almost 240 years ago. “People of the same trade seldom meet together,” he writes, “but the conversation ends in a conspiracy against the public to raise prices.” It’s good that officials caught these fraudsters. It’s been said that the price of freedom is eternal vigilance. I guess this applies to free markets as well.
Douglas R. Tengdin, CFA
Chief Investment Officer
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