Rigging currency markets
Key Excerpts from Article on Website of The Economist
Posted: October 22nd, 2013
[Banks] have rigged LIBOR, an interest rate used to peg contracts worth trillions. Its equivalent in the world of derivatives, ISDAfix, has also come under question. Commodities prices from crude oil to platinum have been the subject of allegations and inquiries. Now prices in global currency markets, where turnover is $5 trillion a day, are being scrutinised by authorities, who suspect bankers have tampered with those too. Switzerlands financial watchdog announced on October 4th that it was investigating a slew of banks it thinks have manipulated currencies. Britain and the European Union also have probes under way. Concerns reportedly centre around abnormal movements ahead of a widely-used daily snapshot of exchange rates, known as the 4pm London fix. It represents the average of prices agreed during 60 seconds trading, and is used as a reference rate to execute a much larger set of currency deals. Bankers, who are big participants in the market, have huge incentives to nudge the price of a given currency pairing ahead of the fix. With billions of dollars changing hands, a difference of a fraction of a cent can add a tidy sum to the bonus pool. If proven, the charge would amount to banks fleecing their clients. Banks know the big trades they are about to execute on others behalf, and are often themselves the counterparty. By moving the markets ahead of the fix, they could alter the rate to their profit and their clients loss. One suspected method is banging the close: submitting a quick succession of orders just as the benchmark is set, to distort its value.
Note: For more on financial corruption, see the deeply revealing reports from reliable major media sources available here.