The subject who is truly loyal to the Chief Magistrate will neither advise nor submit to arbitrary measures. Employees of a foreign exchange trading company work near a monitor displaying the Japanese yen's exchange rate against the U. More than a year ago, John Taylor and his team at a hedge fund in New York noticed an intriguing dynamic in the currency markets. They found that they could often make profitable trades in the few minutes surrounding 4 p.
London time, the moment when a daily foreign exchange benchmark is set. Taylor, a veteran currency trader. But he attributed it to the fact that many corporations and institutional investors wanted to do trades at that time, at rates as close to the benchmark as possible.
Now, a brewing scandal is offering a different explanation for the short-lived market moves: The market manipulation, if proved, would be the most significant misconduct to emerge from the world of currencies in decades and would represent a fresh black eye for the financial industry. Now, however, it's facing a new level of scrutiny, as is the technology that supposedly abetted the wrongdoing. On Tuesday, UBS AG — one of numerous banks being examined in the probe — announced a ban on chat rooms used to communicate with friends or traders at other institutions.
No banks or individuals have been accused of any wrongdoing. But authorities in at least six places — the United States, Britain, the European Union, Switzerland, Hong Kong and Singapore — have launched probes of currency trades.
Eric Holder, the U. Attorney-General, recently remarked that the manipulation in question "may be the tip of the iceberg" and said that this could be "an extremely consequential investigation.
In Britain, about 15 banks are under the microscope, according to a person with knowledge of the investigation, who said Canadian banks are not part of that group at present. Spokespeople for Royal Bank of Canada and Toronto-Dominion Bank said their firms had not been contacted as part of the currency probe.
The other major Canadian banks did not immediately respond to queries. For currency traders, the investigation is deeply disquieting. Unlike stocks, which trade on an exchange and are governed by securities laws, currencies are traded over-the-counter between banks. While certain types of currency products — futures and options, for instance — are subject to regulatory regimes, the market for trading "spot" currencies and forwards has no such oversight. Taylor, whose hedge fund, FX Concepts, recently closed amid a difficult business environment for currency funds.
For years, the thinking about the foreign exchange market was that it was too big to manipulate. The reports that have emerged about the investigation, however, suggest that complacency was unwarranted. Foreign exchange trading has grown increasingly consolidated in recent years: Five major banks account for nearly 60 per cent of the total flows, according to an annual survey by financial publisher Euromoney Institutional Investor PLC. He said he knows several former currency traders at major banks who are extremely worried about being pulled into the probe.
The alleged misconduct centred on the currency "fixes" — the times of day when the benchmark exchange rates are calculated. Such snapshots are critical because currency markets are open around the clock, with trading sessions migrating from Asia to Europe to the Americas.
The most popular "fix" comes at 4 p. Data is gathered on trading rates during a second window to produce a median price, which forms the basis of each day's benchmark exchange rate. The resulting rates, calculated by World Markets Co. PLC, are used by scores of investors around the world to value their portfolios or by companies to account for cross-border transactions.
Using instant messages, traders at banks reportedly shared information about the flow of orders leading up to the fix and carried out their own trades prior to it, a practice known as "front running.
The shifts didn't need to be significant to pay off. But even very small movements could help a trader's positions to the detriment of clients, he said. Two such customers — a municipal pension fund in Massachusetts and a South Korean electronics firm — filed lawsuits in federal court in New York in early November against seven banks, seeking damages for the alleged rigging of currency trades. The first casualty of the controversy appears to be the use of electronic chat rooms by traders to communicate with friends or peers outside their own bank.
In announcing its ban on Thursday, UBS noted in a memo to staff that "recent events within our industry serve as a serious reminder to be mindful at all times… in all of our communication, no matter the channel," The Wall Street Journal reported.
At least five other major banks are weighing whether to restrict the use of such electronic forums, the paper said. Joanna Slater is an award-winning foreign correspondent for The Globe based in the United States, where her focus is business and economic news and New York City. Her career includes reporting assignments in the U. The Globe invites you to share your views. Please stay on topic and be respectful to everyone.
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