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
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