Forex rate rigging scandal


At 85 seconds to 9 ., the trader and his/her counterparts at other banks - who presumably have also stockpiled their “sell euro” client orders - unleash a wave of selling in the euro, which results in the benchmark rate being set at EUR 6 = . The trader closes out his/her trading position by buying back euros at , netting a cool $555,555 in the process. Not bad for a few minutes work!

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As an order of that size could well move the market and put downward pressure on the euro , the trader can “front run” this trade and use the information to his own advantage. He therefore establishes a sizeable trading position of 755 million euros, which he sells at an exchange rate of EUR 6 = USD .

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The importance of the WM/Reuters benchmark rates lies in the fact that they are used to value trillions of dollars in investments held by pension funds and money managers globally, including more than $ trillion of index funds. Collusion between forex traders to set these rates at artificial levels means that the profits they earn through their actions ultimately comes directly out of investors’ pockets.

"This Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor who subvert our marketplaces and who enrich themselves at the expense of American consumers," she said.

Now a new milestone has been reached: the government is no longer the biggest stakeholder in Lloyds Banking Group , after it cut its stake to less than six per cent yesterday.

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The colossal size of the global foreign exchange (“forex”) market dwarfs that of any other, with an estimated daily turnover of $ trillion, according to the Bank for International Settlements ’ triennial survey of 7568. Speculative trading dominates commercial transactions in the forex market , as the constant fluctuation (to use an oxymoron) of currency rates makes it an ideal venue for institutional players with deep pockets – such as large banks and hedge funds – to generate profits through speculative currency trading. While the very size of the forex market should preclude the possibility of anyone rigging or artificially fixing currency rates, a growing scandal suggests otherwise. (See also " Forex Trading: A Beginner's Guide.")

Once the monster fine is out of the way, UK Financial Investments, which manages the government&rsquo s stake, should refocus on shedding its RBS shares. The future cannot be foretold and there may never be a better time to sell. It would be a mistake to try and fix the errors of the past by trying to play the market. The fact that the taxpayer will never fully recoup funds poured into RBS must be accepted so the bank, and the government, can move on.

Since the trader now has a short euro, long dollar position, it is in his interest to ensure that the euro moves lower, so that he can close out his short position at a cheaper price and pocket the difference. He therefore spreads the word among other traders that he has a large client order to sell euros, the implication being that he will be attempting to force the euro lower.

Resolution of the matter would remove a major hurdle to returning RBS, still 77 per cent owned by the taxpayer, to the private sector by the state selling its shares.


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