Forex fraud - is the market rigged?

By: Victoria Harrison

Date: 29 November 2018

Forex fraud - is the market rigged?Make no mistake, the forex market remains one of the most lucrative entities of its type across the globe. In fact, an estimated $5.3 trillion is traded through this marketplace every single day, with this volume breaking down to an hourly spend of $220 billion.

As a popular and highly volatile marketplace, however, it should come as no surprise that this market should have become vulnerable to the machinations of fraudsters and fixers down the years. This was certainly the case in 2015, when six global banks were charged with rigging the foreign exchange markets and profiting at the expense of individual traders.

Much has changed in the months since, of course, particularly in terms of the market's regulatory framework and the scrutiny placed on financial institutions. But have the changes proved impactful, or is the market still at the mercy of fraudsters?

Then and now - what has changed in the market?

The six banks paid a total of $5.6 billion to settle allegations that they rigged the forex market in 2015, with four of these institutions also pleading guilty to conspiring to fix prices and rig lucrative bids.

This remains one of the biggest and ugliest cases of misconduct in the banking sector since the global financial crisis, prompting a huge response from regulators and the Financial Conduct Authority (FCA).

The initial question was how the fix had gone undetected for so long, with some arguing that banks had been engaging in the practice for years. In simple terms, institutions based the fix on actual transactions within an exceptionally short period of time, creating the potential for market players to place a high volume of orders within a fleeting, 60-second window.

These vast and valuable orders would then affect the benchmark calculation and create huge opportunities for institutions to profit, at the expense of individual traders and those who were not part of a major institution. This applied to most investors who operate independently through an online trading platform, while triggering incredible volatility throughout the marketplace.

In the immediate aftermath, many pointed to serious regulatory failings that had allowed the fix to go largely undetected for so long. This came from the belief that regulators considered the forex market too large an entity to be manipulated, causing them to overlook some of the early warning signs indicated at a Bank of England meeting back in 2006.

However, regulators could not be accused of failing to respond to the challenge once the corruption had been revealed. Almost immediately, the Financial Stability Board (a watchdog that advises the G2O finance ministers) established a taskforce to recommend widespread reforms for the forex market.

One of the first recommendations was to extend the daily 4pm benchmark calculation from one to five minutes. This has made it fundamentally harder for organisations to manipulate the marketplace, at least without being detected and subsequently sanctioned by regulatory bodies.

Additionally, the central bank's co-ordinator (known as the Bank for International Settlements), has strived to compel all banks to agree to a unified code of conduct. The final details of this are still be thrashed out and finalised, but this would represent a significant step towards safeguarding the forex market.

Where do we stand now?

The question that remains, of course, is whether or not these measures have proved effective? Some will argue no, particularly with three London-based bank traders having recently been acquitted on charges that they conspired to fix the forex market.

Sure, the acquittal suggested that these individuals were innocent of the charges, but it's clear that market rigging is still a major risk in the foreign exchange and similar entities.

Of course, we've seen institutional cheating and fraudulent activity die down since the latest scandal, thanks to a combination of the new regulatory measures and the more robust approach taken both online and on the trading floor by managers.

Regulators have certainly grasped the challenges posed by light-touch regulatory measures, which served as an invitation to fraudsters to game the rules and influence the market unfairly. So by responding with more intense supervision and hefty financial deterrents the market is undoubtedly safer than it was previously, and this trend promises to continue for the time being.

This is an ongoing battle, however, and one that will continue to shift in line with technological advancement and innovation. With this in mind, regulators and institutions must remain vigilant in the quest to safeguard the foreign exchange markets, while recognising the faults and the flaws that undermined their approach in the past.

Copyright © 2018 Article was made possible by site supporter Victoria Harrison