Six global banks agreed to pay a total of about $4 billion yesterday to settle charges that they rigged the foreign exchange markets. Regulators claim some traders set up chat rooms, where they would share order information prior to the daily fix. The story has all the elements of a Hollywood blockbuster: big money, secretive clubs, special lingo, and mob-like threats.
Source: Wall Street Journal
Only, maybe not. The forex market is an over-the-counter grab-bag where $5 ½ trillion changes hands every day. When I traded FX 20 years ago banks around the world had terminals where we bought and sold currencies from one another. Over time, we got to know which professionals we could depend on and who to avoid.
Sometimes, we knew a customer had a big trade coming up, and we would position ourselves so we wouldn’t get swamped. Looked at one way, we were making sure there was enough liquidity to meet the client’s need. Looked at another way, we were front-running, trading ahead of an expected order flow. Was it a rabbit or a duck? It depends on your perspective, and what you want to see.
Some look at global banks and see nothing but a den of thieves—over-privileged amped-up yuppies. Others see professional teams trying to do deals and make things happen. It’s hard to find the details of what is alleged. Maybe that’s because there are ongoing investigations. Or maybe the details could have two interpretations, and one side has told the other not to talk.
It’s easy to throw stones when big banks announce big settlements about confusing, complex practices. And banks haven’t exactly covered themselves with glory, recently. But until all the facts are known, it’s best to defer judgment about traders behaving badly. As Edmond Burke once said, when you set yourself up as judge of the world, you risk the laughter of the gods.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!