The US Department of Justice has opened a criminal investigation into FX market rigging. The US charges were first reported on Bloomberg on October 11, and confirmed independently with IT’s own market sources. Justice now joins the UK and Swiss financial regulators, which have been investigating suspicious market activities since June.
The UK and Swiss investigations are focused on alleged illegal communications among FX traders, some of whom are thought to have used instant messaging and other methods to evade their firms’ compliance systems. These communications were allegedly used to pool information in order to manipulate the FX market’s benchmark WM/Reuters index. This is calculated and published hourly for 160 currencies. The UK and Swiss authorities have been focusing on four of the largest FX trading houses.
According to an FX market analyst at a bank that is not under investigation, the US investigation also focuses on the WM/Reuters index, in particular the tendency of many currency pairs, including US dollar-Canadian dollar and UK pound-US dollar, to spike sharply very close to 4 pm on the last trading day of the month, before returning to their previous trading levels. The traders with foreknowledge of a coordinated plan are thought to have piled in to push up the WM/Reuters rate to levels where a variety of positions could be executed profitably.
According to Bloomberg: “In the space of 20 minutes on the last Friday in June, the value of the US dollar jumped 0.57 percent against its Canadian counterpart, the biggest move in a month. Within an hour, two-thirds of that gain had melted away.
The same pattern — a sudden surge minutes before 4 pm in London on the last trading day of the month, followed by a quick reversal — occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg.”
The allegations of illegal price rigging in the FX markets mirror somewhat the situations in the Libor scandal and the ISDAfix swap benchmark case. In each case, traders are said to have conspired to submit market-moving data to the index providers, the BBA in the case of Libor and ISDA in the swap case, in order to skew the index in their favor.
It’s notable that the FX conspiracy allegedly was taking place while the big trading houses lobbied – successfully – to be excluded from more oversight and central clearing under Dodd Frank.