There is always a scam somewhere. One of the most recent ones caught was a currency trading scam. In the multitrillion –dollar currency market, just a fraction of a penny difference between two currencies can mean hundreds of thousands of dollars in profit and bank currency traders were brazen exploiting the system’s weaknesses. This is how the currency trading scam worked. They should make a movie about this plan.
The currency market trades about $5 trillion each day-more than 100 times more than the New York Stock Exchange’s $49 billion in daily trades. Inside this sprawling market, participants can make bets on the direction of one currency against another, and reap millions from relatively small fluctuations.
Banks and other investors need to value their currency holdings daily. To do so, they rely on a daily fixing price. Many traders place their bets at the fixing price for others, the fixing price determines their profits or losses.
We all know that one daily fixing price is the World Markets/Reuters fix, which measures the British pound against the dollar at 4.P.M. British time. Another is the European Central Bank fix, which measures the euro against other currencies, typically at 1:15 p.m. British time. In both cases the fixing price is determined by market action at the time of the fix.
This is how the scam worked. According to regulators, settlements with six banks recently, traders would manipulate the fixing price, often seconds before the fix, by making large purchases or sales, pushing prices up or down. These massive buy and sell orders would help the companies lock in gains, often at the expense of their customers.
So who cares? Well we all should care and someone should tighten the reins on the guys doing this stuff. I know that most people’s exposure to the currency market is when they travel. The rogue’s traders’ schemes would have a tiny impact on what you get when you buy or sell currency at the airport. But, the vast majority of currency exchanges involve the U.S. Dollar. Many pension plans and mutual funds use the currency market to reduce their exposure to foreign exchange effects. For example, a fund manager might like the prospects for a German pharmaceutical company but use the currency market to hedge against the risk that the euro will fall against the dollar.
Similarly, a U.S. company could have a contract with an English company. To guard against the value of the pound falling, the company could use the forex market to hedge against currency risk.
“The setting of a benchmark rate is not simply another opportunity for banks to earn a profit.” Aitan Goelman, the CFTC’s Director of Enforcement, said in a statement, “Countless individuals and companies around the world rely on these rates to settle financial contract, and the reliance is premised by faith in the fundamental integrity of these benchmarks. The market only works if people have confidence that the process of setting these benchmarks is fair, not corrupted by manipulation.”\
Is there anything in the world left that is not corrupted?