Groundhog Day: Collusion in the Forex Market

In 2012, it was revealed that some of the world’s largest banks had colluded to manipulate the Libor exchange rate, the internal borrowing rate set by banks. After a series of investigations, fines of up to $6 billion were imposed on a number of ‘reputable’ financial institutions including Deutsche Bank, Barclays and Royal Bank of Scotland.

Apparently undeterred by the searing heat of punitive fines, Icarus (better known as the global financial market), continues to climb towards the luminous orb of super normal profit with reckless abandon. In recent days allegations concerning the manipulation of foreign exchange rates have sparked Britain’s Financial Conduct Authority (FCA) to launch of an investigation into the trading operations of several large banks. In the UK, Barclays and RBS have implemented their own internal investigations, which have already led to the suspension of several traders. The governor of the Bank of England (BoE), Mark Carney is facing intense scrutiny and pressure from UK regulators as some BoE officials are said to have known about the rate fixing.

Similar to the Libor debacle, traders have been using electronic chatrooms to share client order information in an effort to manipulate benchmark exchange rates. These benchmark exchange rates are normally determined by trades executed in a last minute trading period called “the fix” at 4pm in London each day. By concentrating orders in the last minute traders are able to push the rate up or down, thus manipulating the market rate.

The forex market is the largest financial exchange market in the world with a daily turnover of $5.3 trillion. Considering its sheer volume and importance it is poorly monitored. As the bulk of currency trading is carried out by banks these institutions are ultimately responsible for the regulation and oversight of this lucrative market. It is a well known fact that markets perform most efficiently when left to their own devices, however collusion between key players and the actions of irresponsible traders may necessitate the need for federal oversight.

By Brian O’Toole