Foreign Exchange (Forex) market is the world’s largest market, with a daily trading volume of over $5 trillion. The market operates 24 hours a day, five days a week, and involves the buying and selling of currencies of different countries. The Forex market is decentralized, meaning that there is no central exchange or regulatory body to oversee the market. This lack of centralization makes the market vulnerable to manipulations, including rigging.
Forex fixing is the process of determining the daily exchange rate between two currencies. The rate is used to settle contracts, and it is based on the average price of currency trades during a specific time frame. Fixing occurs at specific times during the day, and it is influenced by various factors, including economic data, political events, and market sentiment.
Forex fixing may be rigged for various reasons, including profit-making, market manipulation, and fraud. The following are some of the ways in which Forex fixing may be rigged.
1. Collusion
Collusion occurs when traders from different banks or financial institutions work together to rig the Forex market. Traders may collude to influence the Forex fixing by coordinating their trades to manipulate the price of a particular currency. This collusion can take various forms, such as price fixing, bid-rigging, and market allocation.
Collusion is illegal and can result in hefty fines and prison sentences. The rigging of the Forex market by traders at different banks was exposed in 2013 when regulators in the US, UK, and Switzerland fined several banks for manipulating the Forex market.
2. Insider Trading
Insider trading occurs when individuals with inside information use it to profit from the market. In the Forex market, insider trading can be used to rig the fixing by using information about the expected fixing rate to make trades before the fixing occurs. This can result in a significant profit for the trader and can also influence the fixing rate.
Insider trading is illegal and can result in fines and imprisonment. In 2014, a former trader at Citigroup was fined for insider trading in the Forex market.
3. Front Running
Front running occurs when traders use their knowledge of impending trades to profit from the market. In the Forex market, front running can be used to rig the fixing by placing trades before the fixing occurs. This can influence the fixing rate and result in a profit for the trader.
Front running is illegal and can result in fines and imprisonment. In 2015, a former trader at Barclays was fined for front running in the Forex market.
4. Marking the Close
Marking the close occurs when traders attempt to influence the fixing rate by placing large trades at or near the fixing time. This can create an artificial demand or supply for a currency, which can influence the fixing rate.
Marking the close is illegal and can result in fines and imprisonment. In 2015, several traders at different banks were fined for marking the close in the Forex market.
5. Price Manipulation
Price manipulation occurs when traders attempt to influence the price of a currency by placing large trades in the market. This can create an artificial demand or supply for a currency, which can influence the fixing rate.
Price manipulation is illegal and can result in fines and imprisonment. In 2015, several traders at different banks were fined for price manipulation in the Forex market.
Conclusion
In conclusion, Forex fixing may be rigged for various reasons, including profit-making, market manipulation, and fraud. The rigging of the Forex market is illegal and can result in hefty fines and imprisonment. To prevent rigging, regulatory bodies and financial institutions must implement strict measures to ensure transparency and fairness in the Forex market. These measures can include increasing transparency in the fixing process, implementing strict rules and regulations, and increasing the penalties for those found guilty of rigging the market.
