The world’s largest and most liquid investment market, the 5.3 trillion dollar per day Forex exchanges, may have been subject to manipulation by rogue traders. This follows on the heels of a June announcement by the U.K. Financial Conduct Authority to investigate the matter.
Now, European Union officials are also joining in the probe, as the search for violators widens. Regulators have been examining electronic messages and even postings on business forums for clues. By manipulating currency exchange rates, traders could theoretically secure illicit profits, however, the impact of exchange rate manipulation could have huge impacts on economies across the globe.
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Forex markets are decentralized and operate 24 hours a day
For those of you unfamiliar with the Forex market, it basically refers to the global trading of currency and essentially sets the exchange rate for most free-floating currencies. Forex markets are decentralized and operate 24 hours a day, 365 days per year. Trading per day amounts to over 5 trillion dollars, making Forex markets the largest and most liquid in the world. Most trading is actually conducted by governments, companies, and other organizations that need access to huge amounts of foreign capital in order to conduct international trade.
Given the overall liquidity of the market and the massive volume of trading being conducted, there is little chance that lone traders could manipulate market prices. Large banks, such as Barclay’s, however could in theory trade in high enough volumes to affect prices. Officials suspect that some workers at banks may have been misreporting benchmark exchange rates. So far, it is believed that most of the trading involved the Swiss Franc, though it may be found that more currencies have also been affected.
So far few other details have been released as to how banks may have been manipulating currencies. Officials are also remaining tight-lipped on which banks may have been involved and how much such illicit trading may have impacted markets. With officials across Europe and North America involved, however, the case may be quite serious.
Libor market scandal through which banks were accused
This investigation follows on the heels a an investigation into the rigging of the Libor market scandal through which banks were accused, and in some cases convicted, of manipulating the Libor exchange rate. The Libor rate is the interbank exchange rate for banks based in London and is supposed to reflect how much it would cost one bank to borrow from another. Several banks have already been fined billions of dollars for manipulating the Libor rate.
Any threat or disturbance to the global Forex market could greatly increase economic stability, so regulators will likely take these cases very seriously. The entire global economy literally depends on the steady and predictable flows of currencies to fund international trade and business. If banks and/or traders have been found to be manipulating these flows of money, the potential backlash from regulators could be substantial.
Investigators are also examining whether or not commodities, interest rates, and other markets have been manipulated. Law enforcement officials suspect that banks and traders across the globe have been manipulating prices and rates in order to secure extra illicit profits. With markets already unstable due to a myriad of global conditions, if this cases expands it could depress market prices. For now, however, the on-going financial crisis in the United States and economic slowdown across the world will likely continue to eat up headlines.