
Big investors sue banks in U.S. over currency market rigging - petethomas
https://www.reuters.com/article/uk-forex-lawsuit/big-investors-sue-16-banks-in-u-s-over-currency-market-rigging-idUSKCN1NC34J
======
lordnacho
Former FX fund manager here. I believe the allegations.

What happens is that most derivatives like options or variance swaps are tied
to the daily WM/Reuters fixing in the London afternoon. There's a bunch of
different types of derivatives, but the thing about most of them is they have
some sort of characteristic where the price dependency gets highly nonlinear
towards an expiry.

So this means that someone who had a moderately sensitive position on one day
might have an extremely sensitive position a few days later.

To the point where it might make sense to make sure the price doesn't hit a
certain level at the fixing, by doing a bunch of trades in the spot market
leading up to the fix. Or conversely by making sure it does hit some level by
ramping up the price.

Now you might think it's all more or less a wash, because someone is gonna
have the other side of that derivative, but that's not the case. The banks
tend to have the same sides of the trades against their customers, because the
customers are mostly all after certain payoff schemes.

Apart from there being a motivation, I also believe the allegations because
I've been told the actual positions on certain days. You'd have these days
where nothing was happening at all, and then just before the fix the price
would ramp, or the price would be moving but the graph would have a weird flat
ceiling. So you'd call the brokers and ask him WTF happened, and they'd say
something like "XYZ bank has a huge barrier there", or "Bank X has wants to
knock out this level".

It's very apparent to anyone who looks at any product that has a fixing, I've
traded several (Swaps, FX, Equity Derivs). You start by thinking it's just
noise and there's always someone in the office who will say that, but after a
while you get suspicious of it happening at the same time, plus you have the
broker rumours lining up. It would be great if the free market were restored.

~~~
thkim
Similar case in the rates world is LIBOR fixing. It's an outdated scheme that
managed to escape regulatory attention for a very long time. By design there
is a trust issue yet so much of the global financial system depended upon it.
I have left finance years ago, but there was a movement to move away from
LIBOR as funding index. I'm not sure if that ever happened.

~~~
nothrabannosir
Fwiw, from an outsider's perspective, I hear more and more grumbling about
LIBOR, lately. Disilliusionment with it is reaching the main stream, for
better or for worse.

~~~
zhte415
LIBOR met the mainstream decades ago, in the 80s and 90s a nice guideline, and
ended up pre-financial crises with adoption of financial models that balanced
on the edge of single basis points that depended on a single digit that a not
very well paid team calling traders, that might or might not answer their
phones, and might or might not care to give an accurate number, but when a
number it was not to single basis-point accuracy, just a number from the
floor.

The people playing with complex quantitative systems that depended on single
basis points had no idea of the integrity of the data they were playing with
if they were using LIBOR.

The conclusion I got was: Get out of your code and check your data and how
much you trust it. Then get back in with a whole load of caveats.

------
saosebastiao
I'm curious to know what sort of timeframes they were manipulating on. Most if
the large institutional banks are operating as market makers, which would
likely limit their influence on price movements to a few pips at most. Most
institutional investment firms in forex are not trading as market makers
though...typically operating on much larger time horizons...hours to days. The
amount of capital necessary to manipulate the currency on those timeframes is
incomprehensible. I doubt even the 16 largest banks in the world, even working
as a deal facto cartel, could coordinate price manipulations bigger than 50
pips over the course of a day. I mean we're talking about a quarter of the GDP
of the entire US changing hands every single day via these markets. These
banks are massive, but still nowhere near big enough to materially affect the
markets. It makes me wonder what sort of damages are being claimed, and how
they are calculating those damages.

~~~
cm2187
I am not close to the matter but my understanding is that they were not
accused of pushing prices throughout the day, just around the time of a key
fixing that would be used as reference for the payoff of derivatives.

~~~
moccachino
If that's the case then it seems an easy solution (if the parties involved are
interested in a solution) is to not let any reference point be so brief, but
instead an average over a whole day or even two days.

------
koonsolo
Puts all the "cryptocurrency is a scam/fraud" into perspective.

------
darawk
Does anyone here know the actual mechanics of what's being alleged? In what
sense were these individuals 'manipulating' these markets? The only method I
know of to do that is to spoof orders...but they would have to be making
astronomically sized spoofs to move the FX markets.

~~~
Lazare
This all came out some years ago; this is just a followup lawsuit from the
people who opted out of the first round of litigation.

In short: It didn't work very well, but that's not the point.

Longer form: Traders from several banks shared client positions, and made very
enthusiastic if somewhat amateurish efforts to manipulate the price at the
close. The core of it was trying to figure out if there was going to be a lot
of pressure one way or another on various price pairs, and then trying to
manipulate the spot price at the close to take advantage of it. For example,
if you know a few large clients will be selling a net of £100m for USD, you
might try accumulating a bunch of USD slowly in advance of the close (to avoid
driving the price up), so when the sales hit you can profit. Or you might try
and buy a little USD early, then hold off until right before the close, and
buy a bunch very quickly to try and spike the price heavily, making your
earlier purchases more valuable. Etc.

None of it sounded especially like it would work, many of their techniques
were completely contradictory, and nobody really bothered to try and calculate
if it did work. The FCA said "that it is not practicable to quantify the
financial benefit". One example of a very good trade apparently made US$100k
for the offending banks (on a volume of over $500m); many others lost money.
Total profits from the activity were at most a few millions of dollars per
bank per year, if they even came out ahead; their fines were orders of
magnitude higher.

Or as the CTFC described it:

> If traders in the chat room had net orders in the same direction as what
> they desired rate movement at the fix to be, then the traders would at times
> either (1) match off these orders with traders outside of the chat room in
> an attempt to reduce the volume of orders in the opposite direction
> transacted during the fix period; (2) transfer their orders to a single
> trader within the chat room who could then execute a single order during the
> fix period; or (3) transact with traders outside of the chat room to
> increase the volume traded by chat room members during the fix window in the
> direction favored by the private chat room traders

In other words, to try and drive the price of GBP up the traders might 1) try
and buy GBP from outside banks to stop those banks from selling GBP at the
close 2) not do anything in particular 3) try and sell GBP to outside banks so
that the traders wouldn't need to sell GBP at the close. It seems pretty
unlikely that these are all valid strategies, and indeed, they mostly didn't
seem to work.

> In what sense were these individuals 'manipulating' these markets?

Primarily in the sense they had intent. The actual impact seems questionable.
But with chat transcripts that damning, what more do you need?

(Matt Levine has written about this extensively, among other places, here:
[https://www.bloomberg.com/opinion/articles/2014-11-12/banks-...](https://www.bloomberg.com/opinion/articles/2014-11-12/banks-
manipulated-foreign-exchange-in-ways-you-can-t-teach))

------
Kaveren
> "This manipulation was allegedly done through chat rooms with such names as
> “The Cartel,” “The Mafia” and “The Bandits’ Club,”

 _If_ this is true, it would seem most unwise to discuss your cartel in a
chatroom named "The Cartel".

How high-level would employees in these alleged rooms be likely to rank at?

~~~
village-idiot
Former finance employee here.

We had a blanket ban on any project or program name that was even slightly
insidious sounding, which is easy to do on accident when there are hundreds of
projects and the name will be examined out of context by a regulator with 0
sense of humor.

While it’s possible that the “cartel” started with that intention, it’s also
likely that someone thought it sounded cool at first.

~~~
JumpCrisscross
> _which is easy to do on accident_

One of the first things I did when I took over a trading team was turn off
chat. Trading involves stressful, adversarial interactions with counterparties
and clients. Every person and deal eventually earns a nickname. It helps
nobody when those nicknames appear in writing.

~~~
village-idiot
Wise choice.

------
bernardlunn
Worth reading for those concerned with rigging in much smaller crypto markets

~~~
CPAhem
What haven't these banks rigged. It is not limited to the US. In the UK
Barclays Bank have rigged LIBOR and in Australia the biggest banks ANZ, NAB
and Wespac also rigged the bank swap rate.

What this means is that we all pay higher interest rates on our loans, and the
bankers get a tiny fine.

~~~
A2017U1
Australian regulators waxed lyrical about how "it's different here" at the
time, both sides of politics said the same.

3 years later and the banks ended up in court for interest rate rigging, all
the regulators decreeing innocence from upon high now have lucrative private
sector finance jobs and the relevant ministers lying through their teeth have
long moved on.

No one held at all accountable for supporting a rotten industry, in fact the
opposite. Banks are the new untouchables.

------
bernardlunn
The technical problem is that both Libor and FX have a batch closing cycle…how
quaintly Victorian.

The “close” (aka the “fix”) has a real need. Lots of financial systems need to
enter a FX or Libor rate. You cannot enter a real time rate. You need a rate
on a daily basis. I am sure all systems will go real time at some point, but
that does not solve the problem today.

It is technically simple to come up with some average for the day for both
Libor and every FX pair. I can imagine different algos for this, all open
source (eg. trade weighted average). Systems that need a daily FX or Libor
rate can choose which algo they use. If one algo gets gamed too much, you can
switch to a different one.

That would be a simple surgical fix. It would move the last vestige of
Victorianism from our global financial markets. In the meantime, I am sure we
will get a lot more pain-killers and bandages in the form of lawyers listening
to data mined chat rooms (which will simply force the bad guys to collude in
the sauna or other place where nobody can listen).

------
lifeisstillgood
What confuses me the most is that with all these issues (LIBOR, FX, australia
etc) there is no open independent exchange used - ala a stock exchange.
Instead there are various OTC (read private/not public retail) - with weird
discovery mechanisms like ringing people and asking what rate would you lend
me million quid at (Yes Libor was a series of phone calls!!!)

I cannot prove it (would be interesting) but most financial scandals - and
probably most risk - would vanish if most trading was open independent
exchanges - am I missing something?

~~~
lucozade
> am I missing something?

Yes and no. Firstly, these sort of manipulations happen on exchanges too.
Historically, the main difference has been that it's in the exchange's
interest to spot this stuff quickly and stamp it out.

Also, and this is asset dependent, it's generally easier for an individual to
manipulate a stock price than FX or Libor (back in the day) as they're much
less liquid. As such, more focus was put on detecting and prevention.

For many FX markets, it's practically unfeasible to manipulate the market
without collusion. This is because of the huge liquidity. So the reason why
this was a big deal, and the reason for the convictions, was because of the
collusion. Without that there wasn't much to see here (arguably there wasn't
much of an effect anyway but the private prosecutions should throw more light
on that).

Libor is an interesting case. Similar to FX, it was nigh on impossible to
manipulate in a liquid market without collusion. It is true that the rules do
not apply to an observable rate but, in practice, it was trivial to tell if a
single institute was doing something fishy so they didn't.

Where it all went to crap was when the banks stopped trusting each other.
Libor is the uncollateralised borrow rate. In the period preceding the crash
everyone stopped lending uncollateralised as they weren't sure they would get
their money back. As such, the premise of Libor became flawed as it depended
on an answer to the question "what rate can you borrow uncollateralised?". It
didn't have an option for "there isn't one", and worse, the setters were
pressured into not giving an indication that that was true.

So, in the Libor case, if the borrowing had been on an exchange and the rate
set from an observable price, things would have been better in the sense that
it would be obvious that there was no liquidity (although everyone knew that
anyway). But, ironically, it would likely have been much easier to force
material moves as a single entity because of that illiquidity. And we'd still
end up with the same convictions as they were due to collusion.

Finally, for FX, it's not obvious that an exchange would help for the same
reasons. It's difficult to manipulate without collusion because of the
liquidity. An exchange won't change that. And exchanges are no less
susceptible to collusion than the current FX market. Arguably, they may be
more so if there were multiple exchanges each with less liquidity but that's
just speculation.

------
Lazare
A little background:

First, in the FX market it's quite common to make trades "at the close", ie,
the price at a specific time. In principle this serves everyone's interests,
because you need to agree to _some_ price, and "the price it happens to be at
4pm" makes about as much sense as anything, and it means that customers can
easily check to see what the price was at that time, confirm they paid it, and
feel good that, while they may not have got the best price going that day, at
least they got the "standard" price.

(It might be tempting to tell your bank you want the "best price that day",
but obviously, you only know what that price is after the fact. You could hire
the bank's traders to take a wild stab at guessing when it might be, but
people who can reliably predict the FX markets are too busy sunning themselves
on their yacht made out of gold plated diamonds. Better to just take the price
at the close.)

Second, the bank, having agreed to sell your pile of GBP for USD (or whatever)
for whatever the price at the close is now have some risk. They've got to go
and buy all that USD, and then once they swap it with you for your GBP, they
have to then go sell it for USD, so they can sell that and get back to where
they started. And what if the price crashes in the meantime? So as is proper
(not to mention generally legally required), banks hedge that risk, by, eg,
selling GBP and buying USD in the run up to the close, to make sure they're
covered if prices move against them.

(Hey, doesn't all that hedging actually make GBP cheaper and USD more
expensive? Meaning you'll get less USD for your GBP at the close? Why yes, it
does. If you tell your bank to sell £50m for you for whatever the price is at
4pm, you would expect to see them busily driving the price down in the runup
to 4pm. That'd just good hedging, and it's perfectly legal.)

Third: What's _not_ legal is making a chatroom called "The Mafia" with traders
from other banks, sharing client information, and talking about "taking out
the filth" or "front running". Again, it's fine if it's just within your own
bank, and you properly disclose it in your fine print, and you don't call your
customers names; the issue here is more of branding that substance. There's
nothing wrong with knowing an insurance company is about to sell you £50m,
which means you'll be selling £50m so you frantically run around selling it in
adance...as long as you can plausibly claim to be doing it hedge your trading
risks. If you're doing it a chat room called "trading risk compliance
committee", that might be plausible. If you're doing in a chat room called
"The Mafia", even your lawyer will struggle to keep a straight face.

Fourth: The banks in question already got sued and had to settle for $2.3b in
penalties; it was in discovery that all the colourful chat room names came
out. So it's not in question whether this happened; it did. Nor has any new
information came out (the stuff about the chat rooms came out years ago at
this point); this is just the residual lawsuits from the people who opted out
of the first one.

In short: This is interesting primarily in a horrified "I can't believe these
idiots said this stuff where it was being recorded" sort of way, not because
what was going on was actually that bad. It's not even clear that the traders
in question actually made money from it, or that any actual customers were
harmed. But it seems clear they _intended_ to make money and harm customers
(on purpose, that is, because again, you're allowed, and in fact, strongly
encouraged, to hedge your trading risks, including the risk that your going to
lose a pile of money from your agreement to sell a bunch of GBP on behalf of a
client this afternoon, and the way you hedge that risk is to sell it _now_.),
so...billions in fines. Good job guys.

------
rv-de
> Deutsche Bank

As a German I have to ask what is wrong with this sick piece of a company.
They seem to have their ugly fingers sticking in every pile of dirt
potentially hiding gold nuggets. Disgusting.

~~~
breitling
We say the same thing about Goldman Sachs. I guess every country has their own
villans.

------
sova
Massive breach of trust but what can we expect when such entities are private
with little to no oversight

~~~
baybal2
I'll argue that such things happen regardless of the presence of the
oversight. American financial markets are surely quite bureaucratised, but the
fact that such things still happens in countries that beat US to pulp when it
comes to bureaucratisation of financial industry puts weight to this argument.

I'd say that the biggest aggravating factor to this is that financial industry
is not competitive, not only in US, but pretty much all around the globe. Huge
regulatory pressure surely hampers competition.

~~~
wavegeek
> Huge regulatory pressure surely hampers competition.

Recently decided to open a bank account with another bank so I can shop around
for time deposit rates. The form is 29 pages, almost all to satisfy regulatory
requirements.

The price of one of my medications just tripled (to over $1000/year) due to
the limited number of government approved suppliers, one of which bought the
products from the other and then shut the cheaper competing product down.

> We're from the government and we're here to help ... the industry who
> captured us

~~~
askmike
> The price of one of my medications just tripled (to over $1000/year) due to
> the limited number of government approved suppliers, one of which bought the
> products from the other and then shut the cheaper competing product down.

Maybe read up on countries with proper healthcare systems. The problem you
describe is very much a US problem. I'm very happy with the healthcare system
of my over regulated and bureaucratic country (the Netherlands): everyone pays
insurance starting from less than a $100 a month (but if you don't have enough
income the Government will give you the money to pay for it) and as such
everyone receives healthcare without crazy bills (assuming you take medication
for a medical condition).

~~~
justaguyhere
Most people won't believe that it only costs $100 a month in health insurance
for you! Incredible. Is the coverage good (pre existing etc)? Or are there
nasty surprises (buried in a 5 point font somewhere) that you only come to
know when you fall sick?

~~~
askmike
The only extra cost one might have is "eigen risico" (self risk). Meaning that
the first time something happens in a year you need to pay the first x euro.
But I don't think that applies to everything. I have never paid that (but I
rarely need medical help).

As a more practical example: I travel to Asia a lot and as such I wanted to
get some shots for tropical viruses we don't have in our country (yellow
fever, rabies, etc - note that we do think vaccinations are good). I got
around 10 shots in total, I think the bill was ~1200 euro (~$1500). I
forwarded the bill to my insurance company and they paid it back 100% no
questions asked (note that the shots I got were not mandatory and I wasn't
sick, just wanted to prepare for traveling).

------
negamax
Big banks almost always come across as criminal enterprise. They have years of
heads up and legal/compliance red tape figured out. Bitcoin has it’s own
centralization problems but in the long run (100 years), it can be a better
alternative

~~~
Retric
Bitcoin does nothing to prevent this from happening. It’s a question of how
two currencies are priced relative to each other, but you could get the same
effect with oil or other commodity.

