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An Insight into the Forex Manipulation Scandal

 5 min read / 

The Foreign Exchange Market is the largest and most volatile financial market worldwide. According to The Bank for International Settlements the daily trading volume is around $5.3 trillion. The Forex assets are pairs of currencies from which client can choose numerous combinations. Their prices are simply established through forces of demand and supply, together with continuous economic news in the market.

Therefore, the question arises: why is it so easy to invest in Forex? This is due to the volume and magnitude of trades conducted in the market and thus the high level of liquidity. Additionally, one is able to have a degree of leverage, magnifying moves up and down of a particular investment. Traders can make profit during the day and close their positions for the night. Lastly, it seems very easy to trade currencies, one doesn’t need a specific stock or a company analysis to see the trend in Forex pairs. Hence, if the market is so large, the incentive to cheat and overcome regulation rises.

Within the market, one can take positions on today’s’ spot prices, as well as the future forward prices. Consequently, traders make money on a gap between the price at which they buy and the price at which they sell the currency to the clients. In the past, pegged exchange rates established by the Bretton Woods System, prevented the manipulation of currencies. Nevertheless, after 1973 the dollar-gold standard was eventually removed by American President Richard Nixon. The return of the freely floating interest rates together with a higher volatility of the market, brought an incentive to influence the prices of currencies.

The closing currency “fix” refers to benchmark foreign exchange rates that are set in London at 4 p.m. daily.  Known as the WM/Reuters benchmark rates, they are determined on the basis of actual buy and sell transactions conducted by traders in the interbank market during a 60-second window (30 seconds either side of 4 p.m.). The benchmark rates for 21 major currencies are based on the median level of all trades that go through in this one-minute period.

There are usually three scenarios under which traders tend to act around the fix frame. The typical one (Scenario 1), is to place orders during the fix. If however traders are aware of an increase in prices at a “4 pm fix”, they are likely to place potential orders in the market, prior to the fixing. They can do so either individually (scenario 2 ) or collectively (scenario 3). When placing orders separately, the gain from each trade is quite insignificant. Alternatively, if the traders decide to collude, and submit the orders jointly, the variations on price and thus the profit is maximised. Using trading floor jargon traders can easily “Bang the close”, so place aggressive buy or sell orders and hence manipulate the market.

Scenario 1: Traders submitting orders during the fix (Source: BBC)

Scenario 2: Traders submitting the orders prior to the event (Source: BBC)

Scenario 3: Traders submitting the orders through collusion (Source: BBC)

This was exactly the case in the scandal of May 2015. The collusion of traders from different banks meant that they could have influence on prices of currency pairs prior to the fixing. Following that, banks were capable of earning an extra margin between the price at which they bought and sold at. The scandal involved such giants as HSBC, that earned up to $162,000 profits in May. It did so through sharing of information about theirs’ clients orders and contributing to the downward pressure on the price of GBP/USD in April (Graph 1). Other case was the EUR/USD price (Graph 2), augmented in May predominantly by the Citi traders, ending with a profit of $99,000.

Graph 1: GBP/USD (Source:

Graph 1: GBP/USD (Source:

Graph 2: EUR/USD (Source:

Graph 2: EUR/USD (Source:

Naturally, an illegal manipulation of currencies has been an on-going saga and the Financial Stability Board had increased the investigations over collusion in the markets. One of its proposals included an extension of the fix window from 1 minute to 5 minutes. This would imply that the average prices would be based over a longer time frame, and potential volatility of rates caused by large market orders, would be reduced. Simultaneously, the United States Department of Justice has granted a fine totaling $5.7bn to Barclays, Citigroup, JP Morgan, and Royal Bank of Scotland, all of whom pleaded guilty for collective manipulating on exchange rates.

Taking into account the exchange rate swings, the social impact still remains quite implicit to the general public. While the price fluctuations are too small to be felt by holidaymakers, exchanging rather small amount of currencies, the rise of a threat and a distrust in both the financial markets and Forex traders, create a rather pessimistic ambiance amongst investors, particularly with the clients of the banks, such as pension funds or corporates managing their currency liabilities. Currently, the incentive to cheat driven by a high leverage outgrows the paradoxical low reward as not to cheat for the individual traders.

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