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Whipping FOREX Into Shape

Written By Briton Ryle

Posted July 17, 2014

One way or another, the banks are going to get their money, even if they have to rig the markets to do it.

No, it’s not the stock market that is being rigged (although many have recently raised suspicions of rigging there as well). No, the stock market is too small for the banks to bother with. There exists an even larger market to siphon money out of… the FOREX currency market.

To put the size of the FOREX market into perspective, the trading of all U.S. stocks – the largest equity market in the world – was calculated by Bloomberg earlier this year as averaging some $279 billion worth of trades per day. Add to that all of the other global equity markets in Europe, Asia and elsewhere and you might reach $1 trillion worth of equity trades daily.

The FOREX market laughs at those figures, as it reaches more than $5.3 trillion worth of currency trades daily.

But there’s more than just volume attracting banking thieves to the global FOREX currency market, such as lax rules, a lack of transparency, and the biggest rigging device in existence… the daily “FOREX fix” which takes place at 4 pm every day, London time.

Just what is this FOREX fix, and why is it so prone to rigging? More importantly, if global banks are siphoning undue profits by manipulating the FOREX fix, from where exactly are all those profits being extracted? You won’t like the answer to that last question.


Although the word “fix” is synonymous with rigging, as in “fixing a sporting event”, the financial marketplace uses it as implying a “re-balancing” of prices into a main benchmark price.

Because the prices of currencies are always in flux and constantly changing throughout the day, banks and governments alike find it more convenient to use just one daily exchange rate when calculating the value of foreign currencies held in an account to simplify bookkeeping. The international community has agreed to using the daily “FOREX fix exchange rate” calculated for each currency pair.

They accomplish this daily fixing of currency values by isolating all transactions taking place during just one minute, starting 30 seconds before 4 pm and ending 30 seconds after 4 pm London time. The average exchange rate of every currency pair during that one single minute is then used to value all open positions of foreign currencies in every single portfolio in the world.

For example, if you as an American investor hold some Japanese Yen and European Euro in your investment account, your brokerage firm will use the daily FOREX fix exchange rates of the Yen and Euro as they were valued against the US dollar at 4 pm London time to determine the value of the Yen and Euro you currently hold. Your account statement generated at the end of each trading day thus makes use of this daily FOREX fix, affecting your account value each and every day.

Keep in mind that the daily FOREX fix is used to price the value of only your open currency positions. The FOREX fix does not affect the price of any buy and sell order you place throughout the day.

Because markets all over the world close at different times, the international community has agreed to using each currency pair’s exchange rate as at 4 pm London time in order to standardize the value of open currency positions around the world – just to ensure everyone is using the same exchange rates.

And therein lies all the room needed for banking thieves to make off with billions of dollars of profit without anyone being any wiser to it.

The FOREX Fix is Fixed

As Investopedia describes – in an impressively clear explanation, I must say – allegations of abuses during the daily FOREX fix center on two practices in particular…

a) “Collusion by sharing proprietary information on pending client orders ahead of the 4 p.m. fix… through instant-message groups – with catchy names such as “The Cartel,” “The Mafia,” and “The Bandits’ Club” – that were accessible only to a few senior traders at banks who are the most active in the FOREX market.”

b) “’Banging the close,’ which refers to aggressive buying or selling of currencies in the 60-second ‘fix’ window, using client orders stockpiled by traders in the period leading up to 4 p.m.”

Banks and other institutions will often prefer to have certain currency orders held back specifically for that one-minute FOREX fix window at 4 pm. Because these orders are actually compilations of thousands of client orders into one or two gigantic orders to make them easier to execute, the institution elects to have these gigantic trades placed during that one-minute FOREX fix window – in order to ensure that all of those thousands of individual client orders are all transacted at the same price in the interest of fair pricing for all clients.

As per the above two allegations, when FOREX traders at major banks receive these huge orders well ahead of the 4 pm fix, they secretly communicate it to other FOREX traders at other banks around the world, enabling them to place their own orders ahead of these large orders.

“At 30 seconds to 4 p.m.,” Investopedia explains, “the trader and his/her counterparts at other banks – who presumably have also stockpiled [similar] orders – unleash a wave of selling [or buying]… which results in the benchmark rate being set” at a price favorable to them.

By thus colluding with one another to “bang the close” with a barrage of orders, these traders could influence currency prices up or down at will, allowing their own banks to lock-in a profit from the trades they placed ahead of time.

The process is so common it has its own name… “front-running”, which is also alleged to be perpetrated by high frequency traders.

Heads They Win, Tales You Lose

But just where do such unscrupulous profits come from? Investopedia gives us the sad answer:

“The importance of the WM/Reuters benchmark rates [aka the 4 pm FOREX fix] lies in the fact that they are used to value trillions of dollars in investments held by pension funds and money managers globally, including more than $3.6 trillion of index funds. Collusion between FOREX traders to set these rates at artificial levels means that the profits they earn through their actions ultimately comes directly out of investors’ pockets.” Yours and mine.

The banks extract these profits from you and me in two ways. First, remember those large institutional trades that are destined for the 4 pm fixing window? Many of those orders are placed by pension funds, mutual funds, and other investment funds which you are to some lesser or greater degree invested in. But because FOREX traders and their banks have already taken positions ahead of these large 4 pm orders, the orders placed by pension and other investment funds end up getting filled at a worse price, since the traders and their banks jumped in ahead of us.

Second, remember how the FOREX fix is used to calculate the end-of-day value of open currency positions in every portfolio around the world? When banks collude to artificially pull a currency’s rate down, the value of every investor’s holding of that currency is also pushed down, which can be repeated for multiple weeks and months in a row.

Conversely, when they collude to push a currency’s daily fixed rate up, it improves the value of any positions the banks have in that currency. Forcing a currency to climb for several weeks or months in a row is an easy way for them to increase the value of their holdings which they can later dump at a substantial profit at a later time.

Changes May Be Coming

Rest assured, though, the skimming and scamming is well known, and regulators are working on ways to stop it.

“The world’s top financial regulator [the Financial Stability Board, based in Basel, Switzerland] on Tuesday urged deep-rooted change to how currency benchmarks are set, encouraging market players to tighten up their governance, practices and controls rather than imposing stringent new regulation,” Reuters reports.

The FSB made “a number of recommendations, which include changes to market infrastructure, systems and how the benchmark [FOREX fix] is calculated.”

Yet others are reluctant to pin the blame on the FOREX fix. “We have consistently argued it is not the fix that is broken, but rather it is the manner in which it is used by certain market participants that must be scrutinized,” Marshall Bailey, president of dealer association ACI opined.

To be fair, Bailey makes a valid point. Some banks want to have their currency trades held back for the 4 pm fix in order to have multiple currency transactions placed at the same time which are booked at the same rate to ensure an accurate valuation across many client accounts.

To more fairly accommodate these legitimate 4 pm fix trades, the FSB is looking into ways of isolating orders intended for the fix “to keep them out of the hands of speculative traders – mostly hedge funds and spot dealing desks at major banks”, thus preventing front-running.

Besides the FSB, other regulatory bodies are also getting involved. “Britain’s Financial Conduct Authority and the U.S. Department of Justice opened investigations last October into allegations that senior traders shared market-sensitive information relevant for the London fix,” Reuters informs.

Until the broken FOREX fix is truly fixed, I wish I could recommend something we little investors could do to protect our currency investments. But there really isn’t much we can do, except add our own voices to the clamor for change.

Joseph Cafariello