Can exchange rates be manipulated?


Swiss regulator FINMA investigating several banks for possible manipulation of foreign exchange markets.

Much of the behind-the-scenes chatter in the forex world this past weekend has revolved around the investigation announced Friday by Swiss financial regulator FINMA into the possible manipulation of foreign exchange markets by a number of unnamed banks.

The excitement began after a very terse four-line announcement by FINMA on Friday morning announcing the investigation.

This was followed by some in-depth reporting on the topic by both FT in Europe and the WSJ in the US. The FT revealed that UBS was one of the firms being looked at. The WSJ posited that and the investigation revolved around the daily “4pm fix” of various forex rates (see chart below). Similar to a stock market daily ‘closing price’, the 4pm (London time) daily fix of forex rates are used by both companies and investors to measure their foreign-currency assets and liabilities for accounting purposes.

EURCHF chart around the 4pm fix, August 23, 2013. Source: The Wall Street Journal.

One of the key questions being debated around the investigation is, ‘Can forex rates really be manipulated?’ One of the draws of the forex market for retail investors is the (we believe, correct) perception that the market is indeed a ‘level playing field’ for both retail and institutional traders, with no-one having any sort of real knowledge advantage. Moreover, even if there was someone sinister out there trying to move things their way, the forex market is so huge and liquid it is (nearly?) impossible to manipulate.

For example, daily volume in the EURUSD pair is more than $1 trillion. The most liquid of NYSE stocks (Bank of America, GE, Citigroup…) trades about $1 billion in volume daily. Even hyper-liquid Apple shares trade just $4 billion daily — less than one half of one percent of EURUSD volume. While in stock trading many retail traders feel they are fighting an uphill battle against those much more connected and much more in-the-know, that feeling just hasn’t existed in forex trading.

The WSJ also brings up the possibility that the banks under investigation didn’t necessarily manipulate forex rates, but rather traded for their own accounts ahead of the their clients leading up to the daily 4pm fix, when heavy volumes hit.

This surely won’t be the last we’ll hear of this issue.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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Can exchange rates be manipulated?

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