Financial market experts have long speculated that the $5.3 trillion-a-day foreign exchange market might be manipulated. Even though the system that pension funds, major businesses and institutional investors rely on to trade world currencies dwarfs other financial markets, it has no outside overseers.
"There's no policeman, really," said Marti Subrahmanyan, a finance and economics professor at New York University's Stern School of Business. "These things have sort of fallen through the cracks. Foreign exchange is really nobody's kind of baby."
Now regulators and law enforcement agencies around the globe are focusing on the market amid suspicion that traders at global banks colluded in electronic messaging groups dubbed "the bandits club" and "the cartel" as they tried to enrich themselves at clients' expense.
The early-stage action marks the latest expansion of probes examining financial benchmarks that affect trillions of dollars in business and personal transactions. Investigators have also focused on suspected manipulation of oil prices, interest rate swaps and the London Interbank Offered Rate, or Libor — used to set rates on mortgages, credit cards and loans.
Great Britain's Financial Conduct Authority said it is "gathering information from a wide range of sources, including market participants" in the multinational foreign exchange probe that includes Swiss regulators and the central banks of Hong Kong and Singapore.
"The manipulation we've seen so far may just be the tip of the iceberg," Attorney General Eric Holder, who heads a U.S. probe, told The New York Times. He called it possibly "an extremely consequential investigation."
No banks or traders have been accused of wrongdoing.
JPMorgan Chase, Citigroup, Goldman Sachs, Britain-based Barclays and HSBC, Swiss banking giant UBS, Royal Bank of Scotland and Germany's Deutsche Bank are among the major banks that in recent regulatory filings confirmed their foreign exchange trading is under investigation.
The banks said they have provided information to authorities. Several reportedly suspended some traders or placed them on leave, according to a Nov. 1 federal lawsuit filed by the Haverhill, Mass., city worker retirement system. The lawsuit, which seeks class-action status, targets major banks that dominate the trading.
Traders from several banks discussed their upcoming transactions in online chat rooms or instant-messaging exchanges and nicknamed themselves as members of "the bandits' club" and "the cartel," the lawsuit alleged, citing several media accounts. The sessions hint at collusion in a market experts say bears signs of "susceptibility to index manipulation," the suit charged.
That index represents the foreign exchange rates for 160 world currencies calculated and distributed by a joint venture of The WM Co. and Thomson Reuters. The benchmark is calculated half hourly for 21 major "trade currencies," and hourly for others. Although the market operates around the clock, investors often focus on the daily rates set or "fixed" at 4 p.m., London time. That's when banks guarantee a certain rate for trades of one currency against another.
Several media organizations have reported that investigators suspect bank traders manipulated the market by coordinating high volumes of trades in efforts to nudge currency rates up or down at the 4 p.m. fixing. The tactic is known as "banging the close."
Given the market's vast size, even the suspected bank-trader collusion might have only limited success in moving rates, warned FX Transparency, a provider of foreign exchange cost analysis.
However, Subrahmanyan theorized the collusion could produce a fractional move in the daily fixing rate of currency trading pairs. Foreign exchange trading typically involves a measure called a "pip," which represents one basis point or 1/100th of 1%.
Repeated again and again, "just a few pips can make some people a lot of money," said Subrahmanyan.
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