Teh One Who Knocks
11-13-2014, 11:57 AM
John Waggoner, USA TODAY
http://i.imgur.com/BMPCZ5d.jpg
In the multitrillion-dollar currency market, just a fraction of a penny difference between two currencies can mean hundreds of thousands of dollars in profit — and bank currency traders were brazen exploiting the system's weaknesses.
The currency market trades about $5 trillion each day — more than 100 times more than the New York Stock exchange's $49 billion in daily trades. Inside this sprawling market, participants can make bets on the direction of one currency against another, and reap millions from relatively small fluctuations.
Banks and other investors need to value their currency holdings daily, and to do so, they rely on a daily fixing price. Many traders place their bets at the fixing price; for others, the fixing price determines their profit or loss.
One daily fixing price is the World Markets/Reuters fix, which measures the British pound against the dollar at 4 p.m. U.K. time. Another is the European Central Bank fix, which measures the euro against other currencies, typically at around 1:15 p.m. U.K. time. In both cases, the fixing price is determined by market action at the time of the fix.
According to the regulators' settlements with six banks Wednesday, traders would manipulate the fixing price, often seconds before the fix, by making large purchases or sales, pushing prices up or down. These massive buy and sell orders would help the companies lock in gains, often at the expense of their customers.
Traders used online chat rooms, both to plan their moves and to gloat afterward.
Most people's exposure to the currency market is when they travel. The rogue traders' schemes would have a very small impact on what you get when you buy or sell currency at the airport.
But the vast majority of currency exchanges involve the U.S. dollar. Many pension plans and mutual funds use the currency market to reduce their exposure to foreign exchange effects. A fund manager might like the prospects for a German pharmaceutical company but use the currency market to hedge against the risk that the euro will fall against the dollar.
Similarly, a U.S. company could have a contract with an English client. To guard against the value of the pound falling, the company could use the forex market to hedge against currency risk.
"The setting of a benchmark rate is not simply another opportunity for banks to earn a profit," Aitan Goelman, the CFTC's Director of Enforcement, said in a statement. "Countless individuals and companies around the world rely on these rates to settle financial contracts, and this reliance is premised on faith in the fundamental integrity of these benchmarks. The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation by some of the biggest banks in the world."
http://i.imgur.com/BMPCZ5d.jpg
In the multitrillion-dollar currency market, just a fraction of a penny difference between two currencies can mean hundreds of thousands of dollars in profit — and bank currency traders were brazen exploiting the system's weaknesses.
The currency market trades about $5 trillion each day — more than 100 times more than the New York Stock exchange's $49 billion in daily trades. Inside this sprawling market, participants can make bets on the direction of one currency against another, and reap millions from relatively small fluctuations.
Banks and other investors need to value their currency holdings daily, and to do so, they rely on a daily fixing price. Many traders place their bets at the fixing price; for others, the fixing price determines their profit or loss.
One daily fixing price is the World Markets/Reuters fix, which measures the British pound against the dollar at 4 p.m. U.K. time. Another is the European Central Bank fix, which measures the euro against other currencies, typically at around 1:15 p.m. U.K. time. In both cases, the fixing price is determined by market action at the time of the fix.
According to the regulators' settlements with six banks Wednesday, traders would manipulate the fixing price, often seconds before the fix, by making large purchases or sales, pushing prices up or down. These massive buy and sell orders would help the companies lock in gains, often at the expense of their customers.
Traders used online chat rooms, both to plan their moves and to gloat afterward.
Most people's exposure to the currency market is when they travel. The rogue traders' schemes would have a very small impact on what you get when you buy or sell currency at the airport.
But the vast majority of currency exchanges involve the U.S. dollar. Many pension plans and mutual funds use the currency market to reduce their exposure to foreign exchange effects. A fund manager might like the prospects for a German pharmaceutical company but use the currency market to hedge against the risk that the euro will fall against the dollar.
Similarly, a U.S. company could have a contract with an English client. To guard against the value of the pound falling, the company could use the forex market to hedge against currency risk.
"The setting of a benchmark rate is not simply another opportunity for banks to earn a profit," Aitan Goelman, the CFTC's Director of Enforcement, said in a statement. "Countless individuals and companies around the world rely on these rates to settle financial contracts, and this reliance is premised on faith in the fundamental integrity of these benchmarks. The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation by some of the biggest banks in the world."