How the Forex ‘Fix’ May be rigged

How the Forex ‘Fix’ May be rigged

Submitted by adil on Wed, 07/23/2014 - 19:50

What's the Forex Fix?

Traders use a couple of corridors in order to affect the forex ‘fix’. They may set it artificially and finally rig it. Given below are a couple of points that can give you an idea of the rigging.

• Collusion is the result of sharing proprietary information. It is done on the basis of client’s pending orders that a trader receives before the 4 pm ‘fix’.  Information is allegedly shared through electronic chat rooms by exchanging instant messages. These electronic chat rooms are named such as ‘The Cartel’, ‘One Team, One Dream’ and ‘The Bandits Club’. But these rooms are only accessible to a few traders who play an active part in the forex market. Membership for these rooms is highly sought-after.
• The ‘fix’ window refers to currency’s volatile sale and purchase that is executed in the 60-second ‘fix’ window. Traders pile up clients’ orders during the period leading to 4 pm and make a frequent sale and purchase in the 60-second window.

How the rigging is executed:

Let’s suppose that a trader, who works at the London branch of a big bank, receives an order at 3:45 pm. The order is placed by a U.S. multinational company. The company needs to sell its one billion euros and buy dollars in exchange at the 4 pm fix. The exchange rate is EUR 1= USD 1.4000 at 3:45 pm.

Such a hefty order could move the market and is capable of pressurizing euro downward. The trader, who has the information, can front run this trade and use the information well for his own advantage. A trading position is established. He sells 250 million euros at the exchange rate of Eur 1= USD 1.3995 before time.

Now a short euro and long dollar position is established which goes in the trader’s interest and ensures that the euro slides lower. In this way he may close out his short euro position at a much cheap price and easily earn the difference. Then he circulates the information among traders that he has a hefty order to sell euros. The implication, drawn out of it, is that he will attempt to pressurize the euro to a lower position. A wave of selling in the euro is unleashed at about 30 seconds to 4 pm by all his counterparts at other banks and traders who have been stockpiling their ‘sell euro’ client orders. The result is that the benchmark rate is unfairly set at 1.3975. Hence the trader bags a handsome $500,000 out of this tricky few-minutes process. The U.S. multinational loses $1.5 million by getting a much lower price as a result of collusion.  

Collusion becomes imperative:

But, oddly enough, the front running showed in the above example is not illegal in forex markets considering the giant size of the forex market.

A trader, who is not a part of collusion, may run heavy risk if he settles 250 million short euro position. The euro may shoot up in the 15 minutes before 4 pm and be fixed at a higher level.  Sudden improvement in the Greek economy and unexpected growth in Europe are the two main reasons that can affect this development.

Hence traders mitigate these risks by sharing information and scheming for a pre-determined act in order to drive exchange rates to their desired direction.