“Banks are market-makers in foreign exchange, and to a large degree you can’t avoid them,” O’Brien said. “People have to trust the pricing.”
Four banks control more than half the foreign-exchange market, according to Euromoney’s survey. Deutsche Bank, based in Frankfurt, was No. 1, with a 15.2% share, followed by Citigroup with 14.9%, Barclays with 10.2% and UBS, Switzerland’s biggest lender, with 10.1%.
The WM/Reuters rates for 160 currencies, used as a benchmark by companies and investors around the world, are determined by trades executed in a minute-long period called “the fix,” starting 30 seconds before 4 p.m. in London.
The data is collected and distributed by World Markets Co., a unit of Boston-based State Street Corp., and Thomson Reuters Corp. Bloomberg LP competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.
Thomson Reuters said it “would lend its expertise to support any authorities’ investigation into alleged disruptive behavior on benchmarks.” The company doesn’t administer the WM/Reuters rates, it added in an e-mailed statement.
“The WM/Reuters benchmark service is committed to reliability and robust operational standards,” State Street said in an e-mail. “WM continually reviews recommended methodology and policies in order to ensure that industry best practices are considered.”
Aside from trading after economic events such as interest-rate cuts, 4 p.m. is the busiest time for currency dealers as customers place orders to be transacted at the fix price.
Things are even more hectic on the last working day of the month, when tracker funds buy and sell currencies with their banks. The funds say they have to trade at the fix because the global indexes they track, such as the MSCI World Index, are calculated once a day using the 4 p.m. WM/Reuters rates.
The frenzy begins an hour earlier on trading floors as dealers jockey for advantage. Bids and offers are exchanged. Slang is common. Mio means million. A yard is a billion.
Because traders promise clients they’ll get the fix price, it leaves banks open to losses if the market moves against them, one London-based dealer said. He described trading at the fix as a loss-leader that helped his firm win client business.
To make money, traders interviewed by Bloomberg News said they would share information with counterparts at other firms and trade ahead of large client orders. Most tracker funds place their orders as much as an hour before the fix, giving dealers a glimpse of possible future price movements, which they can use to take positions. Traders on instant-message groups increased their chances of predicting market moves by pooling details of their order books and agreeing to align positions at the fix, according to three people with knowledge of the practice.
Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.
Some dealers said the tactic is legitimate and necessary for banks to protect themselves from losses. Traders who agree to buy or sell at the close need to push through the bulk of their orders during the window to minimize the risk of losses from market movements, the traders said.
One large transaction can be enough to move the market. A former bank trader said that if he received an order from a customer at 3:30 p.m. to sell 1 billion euros ($1.37 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his bank’s own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.
While foreign exchange is unregulated, dealers are prohibited by market-abuse laws from trading on inside information and sharing confidential data about client orders with third parties. In recent years, banks have tightened rules on employees’ trading for their own accounts. Many require staff to hold investments for at least 30 days and obtain written clearance from compliance officials for personal dealings.
The U.S. Commodity Futures Trading Commission, which has no oversight of the spot market, does regulate foreign-exchange futures, contracts that allow companies or investors to speculate on or hedge against the price movements of currencies. Some of those contracts, such as cash-settled forwards traded on the Chicago Mercantile Exchange, use WM/Reuters rates to determine who owes what at settlement. The agency has been reviewing potential violations of the law, according to a person with knowledge of the matter.
Its chairman, Gary Gensler, who declined to comment about any investigation the agency might be conducting, said the CFTC is understaffed, with 670 employees, when more than 1,000 would better fulfill its mission.
“We need to make sure reference rates are not based on a closing price that’s manipulated,” Gensler said in an interview. “The CFTC does not have enough people, period.”
In the U.K., the government is introducing laws designed to curtail market manipulation and punish traders found guilty of wrongdoing. In April, it became a criminal offense for anyone to knowingly make false or misleading statements relating to the setting of benchmarks. Other proposals include deferring bonuses for as long as 10 years and guaranteeing rights for whistle- blowers. They stop short of recommending specific regulations of the spot foreign-exchange market.
Even if regulators were watching the currency market, there would be a question of what they’d see and whether they’d be able to identify wrongdoing, said Felix Shipkevich of Shipkevich PLLC, a derivatives law firm in New York.
“Who has the expertise to determine if there’s any potential unlawful activity going on?” he said. “There are very few people who understand the over-the-counter market.”