Rigged Currency Markets? Standard Trading?

I’m torn between writing a mega-post about my thoughts on today’s Bloomberg article about foreign exchange “rate-rigging” as it compares to my experience in equity markets in my career – and keeping it simple.    I’m gonna try to keep it simple.


First, read the Bloomberg article.  Key “tidbit” is here:

“One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

He would profit from the difference between the reference rate and the higher price at which he sold his own euros, he said. A move in the benchmark of 2 basis points, or 0.02 percent, would be worth 200,000 francs ($216,000), he said.

Then, read Matt Levine’s post on the subject.  Key “tidbit,” reacting to the part I just excerpted from Bloomberg,  is here:

“Well of course he would, right? I mean, that’s what that order is; it’s:

  • Client takes the risk that the WM/Reuters close won’t be all they’d hoped it would be,1 and
  • Bank takes the risk that it won’t be able to fill client at the WM/Reuters close.

The bank can choose to sell at the WM/Reuters close – that is, sell over the 60-second period where trades are sampled to create the fixing – to minimize the risk of missing the price. Or it can do whatever it wants, hope to trade at better than the WM/Reuters fix, and run the risk of trading at worse – but in any case pass on the benchmark price to the client. Either way, though, if the bank can sell its euros to the market at a higher price than it can buy them from the client at the fixing, it has made money. And its job is to make money. So it might as well work on both sides of that equation.

Then, ponder this comment on Matt Levine’s post from a Dealbreaker reader:

As a FX trader for more than 20 years, I’d like to know what the scandal is here. If I have an order to sell 1 billion euros at the WMR fix, I have 2 choices:
1. do nothing until the fix and execute the order as instructed by the client by selling 1 billion euros over a 60-second period; but, wait, apparently, I’m “banging the close”.
2. anticipate the fix and sell, say 200 million euros, early and pocket the difference when the fix is set lower; but, wait, what if my not-so-good friend Joe at competitor X has to BUY 3 billion euros at the same fix? Where does the loss on the 200 million euros go? Correct, in my P/L.
So, I either execute as per client’s instructions and get blamed for it, or I front run the order and have a true market exposure that will be rewarded or punished, and I get blamed for it.
In short, Bloomberg is trying too hard to hit back at Reuters.

Then, ponder this statement from me:

Markets are used to transfer risk from those who don’t want to take it to those who do.

It would make me happy if I didn’t have to write a mega-post about this… We’ll see.


Bloomberg: Traders Said to Rig Currency Rates To Profit Off Clients

Levine: Everybody Always Manipulated Everything, Basically

EDIT: UPDATE 7pm 6/12/2013

Felix Salmon writes a post on this subject, quoting from Izabella Kaminska’s own post which I had missed.


““Concentration” tactics are normal practice for the industry. It’s the equivalent of creating economies of scale and then choosing the moment to transact so that the depth of the market, and it’s likely impact on the price, is most beneficial to you. It’s called skillful execution.”


“All of this is consequently very hard to police — not least because it’s a market maker’s ability to protect himself with hedges that allows him the ability to offer competitive rates in the first place.

As for why traders at banks are mixing their own principal into all this at all? Easy, because market-making is a principal risk-taking business by definition. It needs base capital to fund and manage hedges, but also to weather and absorb client positions in the course of bringing them liquidity.”

Felix Salmon:  Annals of Market Manipulation: FX Edition

Izabella Kaminska: Trading, Market-Making, Speculation or Manipulation – Who Knows Anymore


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