Forex is Rigged – Institutional Style

We’ve long held that individuals wanting to put money into forex is akin to put your brain on drugs (see here); (this is your portfolio- this is your portfolio on Forex). But we thought big institutional investors were a little better at knowing the risks and games the forex dealer play to separate you from your money… maybe not.

Enter a Bloomberg story this month outlining how traders at the world’s largest banks are manipulating foreign exchange rates to set the value of investments (i.e rigging the market to make a profit off their customers).  This doesn’t just happen once a month, or twice a month, but every day. This insider information is coming from five dealers with a vast knowledge of what’s going under behind the curtains of Forex trading, and explains how it works.

“Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set.”

So how does that make them more money? Bloomgberg provides a good breakdown.

“To maximize profit, dealers would buy or sell client orders in installments during the 60-second window to exert the most pressure possible on the published rate, three traders said. Because the benchmark is based on the median of transactions during the period, placing a number of smaller trades could have a greater impact than one big deal, one dealer said.”

Now – some have come out in defense of the banks practice (you don’t hear that every day), saying this is nothing more than the offset of risk from the customer to the bank:

Markets are used to transfer risk from those who don’t want to take it to those who do.

We guess there is some truth in that, but does the customer know the bank is doing this. It’s one thing if the offset of risk is transparent and clear, quite another if it’s hidden from customer’s view.  And the most infuriating part about Forex to us, is that even though all of it sounds incredibly unethical, none of it is illegal. As we’ve noted before, we can’t sell you a Corn futures contract at an inflated price, then simultaneously buy the same contract at the exchange for less – booking the difference – but that’s the way the game works in Forex. As we’ve said before (here, here, and here for example) and we are likely to say again: AVOID FOREX

2 comments

  1. “As we’ve noted before, we can’t sell you a Corn futures contract at an inflated price, then simultaneously buy the same contract at the exchange for less – booking the difference – but that’s the way the game works in Forex.”

    Wow… really? Let’s update our complaints about the Forex market from 10 years ago, shall we? You don’t think paying the spread on a Corn futures contract is the same thing done “legally”? Tack on the commission charged on the contract in the futures market and the cost is increased further. In case you missed the business model of the industry you work in, this is a cost of doing business for a trader.

    Here are the facts… the price and spread OF ANY CONTRACT are known before you enter the contract in any market, INCLUDING THE FOREX MARKET. What happens to the contract on the broker/bank’s side in the “60 seconds” after it’s placed really doesn’t matter. The risk is THE BROKER’S, NOT THE TRADER’S. If you’re getting too much “slippage” from the orders you place with your Forex broker (or any broker) then find another broker. These days the competition is too great to put up with the type of tactics that you’re talking about here… and it’s too easy to find a reputable Forex broker that will fill your orders at the price and spread advertised.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.