It’s cost them fines totaling £2 billion. Five of the world’s biggest banks have been
ordered to pay up by UK and US regulators as a first punishment for rigging the foreign
exchange market. The Commodity Futures Trading Commission said
its investigation found certain foreign exchange traders had coordinated their trading with
one another to attempt to manipulate benchmark foreign exchange rates. But how exactly do you manipulate the market? During the day, traders receive orders from
clients like international businesses which need to buy and sell currencies to run their
global operations. Every day, a currency “fix” is agreed, based
on the price that currency trades at over a 60 second period. Before the fix, clients place orders to buy
or sell currency at a specific volume at the fix rate. Traders then start buying for their client
ahead of the fix. Traders then discuss the orders they have
via telephone calls or online chat rooms. Many form tight knit groups to basically information
about clients and currency orders. Following the current investigation, traders
are supposed to have colluded to set a currency rate through these conversations using code
names such as the 3 musketeers or the A-team to describe clients. It all essentially means that after traders
start buying for their client ahead of the fix, they can then sell on at a profit when
the price rose. The bank then charges the client at the fix,
a higher price than the bank has actually paid. Meaning the bank wins twice, it buys the currency
itself cheaply and sells at the higher fix. It also charges its clients more than it paid
for the currency.