Focus seems to be on chat room activity around the daily 4pm London fix.
A report Friday by Bloomberg suggests that the US Justice Department and the FBI are conducting separate criminal probes into foreign currency rate market rigging by some of the world’s biggest banks, around the daily 4pm fix of various currency pairs.
The report comes following news that the UK’s FCA and Switzerland’s FINMA are already deep into investigations of their own.
What is the daily 4pm fix? Unlike equity or bond markets, currency pairs are not traded on exchanges, and therefore do not have any official price. Also unlike equities and debt, FX pairs trade 24 hours around the clock, meaning that there is no daily ‘closing price’ for currency pairs. However, an ‘official’ daily price is necessary for many practical uses, such as money managers reporting the values of their portfolios, or banks calculating required capital.
Enter the 4pm fix — a daily snapshot computed from market activity at several leading financial institutions in a brief window around 4pm.
According to the Wall Street Journal, the focus of the investigation(s) is on whether or not traders and/or executives at several leading banks would regularly discuss and set the fix, in online chat rooms, to the benefit of their own trading activities. Or, if they would trade ahead of clients near the time of the fix, when they knew that a lot of client volume would arrive.
If evidence of wrongdoing is indeed found, this could be very big, involving many of the world’s leading banks. Either way, it might lead to a change in the way the daily 4pm fix is set.
The investigations also explain why many institutional traders are turning away from banks and toward ECNs and the institutional trading arms of firms such as FXCM (NYSE:FXCM) and Gain Capital (NYSE:GCAP). Institutions simply do not want to be trading with firms that also trade for their own account.