Dozens of forex traders arrested.
47 charged in raids on alleged illegal currency trading firms.
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NEW YORK, Nov. 19 — Federal authorities announced charges Wednesday against 47 people in a broad crackdown on fraud in the foreign currency exchange market that officials said bilked millions from big-name banks and small investors alike.
Most of the bankers, stockbrokers and traders were picked up in raids late Tuesday and early Wednesday in what law-enforcement officials called their most sweeping infiltration ever into the foreign currency markets.
The principal charges accused currency traders at some banks of making rigged trades designed to lose money — then taking cash kickbacks from co-conspirators who made money on the deals.
An undercover FBI agent discovered 123 rigged trades totaling $650,000 in just a few months, authorities said — but they cautioned similar fraud has likely been carried out for decades in the decentralized, loosely regulated foreign currency market.
Currency traders at J. P. Morgan Chase and UBS Warburg, two of the nation’s most prominent investment banks, were among those arrested.
Also arrested, officials said, were operators of so-called “boiler rooms” who persuaded individual investors to give them money for what they portrayed as sound currency investments — then simply stole the cash.
More than 1,000 individual investors were cheated out of tens of millions of dollars when they were talked into putting their money into operations with “fancy-sounding names,” Manhattan U. S. Attorney James Comey told reporters.
“There are a lot of sharks in that water,” Comey said. “We in law enforcement suggest careful reflection from the beach before you jump in.”
Authorities stressed that while the alleged fraud was widespread, it constitutes only a fraction of the trillion-dollar-a-day foreign currency market. They said no banks were implicated in the fraud.
The currency exchange market has no central headquarters, instead operating 24 hours a day as a worldwide network of traders, connected by telephones and computers. In 2001, an estimated $1.2 trillion was traded daily, with banks conducting most of the trades. Currency brokers also play a role, acting as intermediaries between banks.
The charges announced Wednesday resulted from an 18-month investigation that spread to six states: New York, New Jersey, Connecticut, Florida, Tennessee and Colorado.
Charges filed against the 47 defendants included bank fraud, mail fraud, wire fraud, securities fraud and money laundering. There was no immediate word on when they would appear in court.
Federal authorities said 40 of the 47 were arrested late Tuesday and early Wednesday, two were previously arrested and the remainder were expected to be arrested later.
Among those arrested was Stephen E. Moore, who formerly served on the foreign exchange committee of the Federal Reserve Bank, prosecutors said. An attorney for Moore could not immediately be reached.
In one raid, several people were arrested at lower Manhattan’s World Financial Center as they gathered for drinks before taking a planned gambling trip to Atlantic City, N. J., authorities said.
Several of the traders told the undercover FBI agent they had “no fear” because they believed law enforcement would never get close enough to stop them, said Pasquale D’Amuro, director of the FBI’s New York office.
© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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Forex scandal: How to rig the market.
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The foreign exchange market is not easy to manipulate.
But it is still possible for traders to change the value of a currency in order to make a profit.
As it is a 24-hour market, it is not easy to see how much the market is worth on a given day.
Institutions find it useful to take a snapshot of how much is being bought and sold. Until February, this happened every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.
Since these violations came to light, the window has been changed to five minutes to make it harder to manipulate.
The fix is very important, as it is the peg on which many other financial markets depend.
So how do you make currency prices change in the way you want?
Traders can affect market prices by submitting a rush of orders during the window when the fix is set.
This can skew the market's impression of supply and demand, so changing the price.
This might be where traders obtain confidential information about something that is about to happen and could change prices. For example, some traders shared internal information about their clients' orders and trading positions.
The traders could then place their own orders or sales in order to profit from the subsequent movement in prices.
This can relate to the 4pm fix, with a trader placing a trade before 4pm because he knows something will happen at around 4pm.
It is easier to move prices if several market participants work together.
By agreeing to place orders at a certain time or sharing confidential information, it is possible to move prices more sharply.
That could result in traders making more profits.
Collusion can be "active", with traders speaking to each other on the phone or on internet chatrooms. It can also be "implicit", where traders don't need to speak to each other but are still aware of what other people in the market are planning to do.
'Hooray nice teamwork'
Last November, the UK's financial watchdog, the Financial Conduct Authority (FCA) gave some examples of how traders at banks calling themselves names such as "the players", "the 3 musketeers", "1 team, 1 dream" and "the A-team" attempted to manipulate foreign exchange markets.
In one example, it said traders at HSBC had colluded with traders from at least three other firms to attempt to drive the fix for the sterling-dollar rate lower.
It said traders had shared confidential information about client orders prior to the fix, and then used this information to attempt to manipulate the fix downwards.
The sterling/dollar exchange rate fix fell from £1.6044 to £1.6009 in this particular example, making HSBC a $162,000 profit.
Afterwards, traders congratulated themselves, saying: "Loved that mate. worked lovely. pity we couldn't get it below the 00", "there you go.. go early, move it, hold it, push it", "nice works gents..I don my hat" and "Hooray nice teamwork".
In another example, the FCA said Citi traders had attempted to drive the euro/dollar fix upwards by sharing information on its buy orders with traders at other firms.
Traders at these firms then transferred their buy orders to Citi, giving it more influence on the market.
Ultimately, the euro/dollar fix rose and Citi's profit for the trade reached $99,000.
After the trade was completed, traders shared congratulatory messages such as "lovely", "yeah worked ok" and "cn't teach that".
Who gets hurt?
The price movements arising from the manipulation are so small that holidaymakers are unlikely to notice a big difference when buying foreign currency.
The biggest losers are companies found guilty of manipulation. Even for big banks £2bn is a lot of money.
The regulators say that some of the banks' clients could have suffered from the market being skewed. That could affect the value of pension funds and investments.
This kind of manipulation also further undermines trust in the financial system, which has been through a series of scandals.
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“I don my hat,” said one trader after a particularly lucrative fix trade for RBS. “Well done lads, chimed in another. “[RBS] is god.”
The chat logs, filled with spelling errors and bodged metaphors, show another currency dealer cheering that “we fooking killed it right, [unnamed company], myself and RBS”.
In a frantic 60 seconds of trading, RBS had sold £182m, bearing little resemblance to its client order book, to try and push the sterling-dollar rate lower. The bank was responsible for almost a third of all trading in these currencies during the crucial 4pm fix window.
The pound fell from $1.6233 to $1.6218 by the time WM Reuters published that day’s price, to be used as a benchmark by clients and funds around the world.
The trades generated $615,000 in profit for RBS.
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The Financial Conduct Authority yesterday released hundreds of pages of detail on the various ways currency traders worked together to rig ten currencies during the fix windows between 2008 and 2013, in a market that worldwide turns over more than £3 trillion a day.
A JP Morgan dealer agreed to “double team em” during one attempt to boost the euro-dollar rate, in tandem with one other trader. “We…do…dollarrr,” he crowed after a minute of trading that left his bank sitting on a profit of $33,000.
Orders were described in chatrooms as “leaving you with the ammo”, “clearing the decks” or “taking out the filth” as the chatroom groups paired off orders with outsiders to ensure trading was heading in the right direction for their desired fix price.
They also called on one another to jolt prices and trigger a stop loss, a trade arranged in advance to cut losses for a client at a certain level, aiding the traders if they bought at a cheaper price. “HIT IT… I’m out of bullets haha,” wrote one.
The traders worked closely together for years, to the extent that they got frustrated if they were left out of a collusion. “U are uselees… how can I make free money with no ****ing heads up,” wrote one HSBC dealer.
Earning money on currency trades is legal, and even the traders’ tactic of “netting off” orders, or matching buyers and sellers ahead of the fix window, is deemed acceptable by the watchdog.
However, the FCA has found after six years of investigation that the firms failed to responsibly manage and organise their businesses, prompting huge fines.
Senior regulators heard noises about troubling trading patterns in the London fix as early as 2006, when bankers dropped hints over lunch at Smiths of Smithfield that prices were being shunted by “players that had no particular interest in that fix”.
Currency experts at 11 banks would meet every quarter with Bank of England officials to chew over the main problems facing foreign exchange, from currency wars between central banks to how Hurricane Katrina was affecting the dollar. Get-togethers in the early days were held at Gaucho, known for its steaks, and The Don bistro, next to St Mary-le-Bow church in the heart of the City. In October 2005, during one of the first meetings, the minutes recorded that the members were arranging pre-Christmas team drinks.
But it wasn’t until 2008, when the meetings had graduated to office suites in the City and Canary Wharf, that Bank of England official Martin Mallett went into what he called “preach mode”.
The bankers didn’t see his stance as particularly threatening. “[The Bank] showed a little concern with banks openly chatting to each other on reuters/bloomie about the upcoming fixes and matching them off,” reported UBS currency expert Niall O’Riordan after the meeting in July 2008, his first outing as the bank’s representative in the Bank of England chief dealers’ sub-group.
“They feel these discussions pre trading [might] come up on the radar… purely hypothetical but . that apart it was pretty run of the mill stuff.”
Insiders told UBS between November 2010 and December 2012 that foreign exchange traders were misbehaving, but the bank failed to act beyond its own internal reviews. Other banks also received accounts from whistleblowers.
Meanwhile, the regulators in the UK, the US and around the world started to look seriously at these markets, though as Mr Mallett pointed out as late as 2012, foreign exchange is “inherently chatty, and that’s actually what… facilitates the exchange of information and makes the market an efficient place to operate”.
However, as Barclays became the first bank to succumb to a settlement for rigging Libor in mid-2012 , the writing seemed on the wall for any benchmark that based its price on submissions from a handful of bankers.
“In the cold light of day in a court of law a year, two, three, five years from now will make people uncomfortable,” said Mr Mallett in April 2013 as he spoke about the chat logs.
The six banks that settled yesterday have suspended dozens of employees between them and promised to get to the bottom of why this behaviour went unchallenged.
A Serious Fraud Office investigation is ongoing, as is a probe by the New York Department of Financial Services.
Goldman Sachs and 13 other banks, some involved in the foreign exchange scandal, have backed a new chatroom system that intends to be more secure than Reuters or Bloomberg – as well as easier to police.
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EUR/USD Bull-Flag Unfolds Ahead of U. S. CPI Report.
Central bank policy, economic indicators, and market events.
- U. S. Consumer Price Index (CPI) to Climb to Annualized 1.8%- First Uptick Since February.
- Core Rate of Inflation to Hold Steady at 1.7% per Annum.
Trading the News : U. S. Consumer Price Index (CPI)
An uptick in the U. S. Consumer Price Index (CPI) may stoke a near-term pullback in EUR/USD as signs of rising inflation puts pressure on the Federal Open Market Committee (FOMC) to further normalize monetary policy in 2017.
Why Is This Event Important:
Even though Fed Fund Futures largely price a 50% probability for a move in December, Chair Janet Yellen and Co. may stay on course to deliver three rate-hikes in 2017 as central bank officials expect to achieve the 2% target for inflation over the policy horizon. In turn, the FOMC may endorse a more aggressive approach at the next interest rate decision on September 20 especially as the FOMC ‘ expects to begin implementing its balance sheet normalization program relatively soon .’
However, another dismal development may spark a bearish reaction in the greenback as it encourages the Fed to preserve the current policy throughout the remainder. As a result, the U. S. dollar may continue to exhibit a bearish behavior over the coming months if they key data prints coming out of the real economy drag on interest-rate expectations.
Impact that the U. S. CPI report has had on EUR /USD during the previous print.
(1 Hour post event )
(End of Day post event)
07/14/2017 12:30:00 GMT.
June 2017 U. S. Consumer Price Index (CPI)
EUR/USD 5-Minute Chart.
The U. S. Consumer Price Index (CPI) slowed to an annualized 1.6% from 1.9% in May, while the core rate of inflation held steady at 1.7% for the second consecutive month. A deeper look at the report showed the weakness was led by a 1.6% decline in energy prices, with transportation costs narrowing 0.7% in June, while prices for food & beverages held flat during the same period. The greenback lost ground following the weaker-than-expected CPI report, with EUR/USD climbing above the 1.1450 region to end the day at 1.1465.
How To Trade This Event Risk ( Video )
Bullish USD Trade: Headline and Core Inflation Picks Up in July.
Need a red, five-minute candle following the print to consider a short EUR/USD trade. If the market reaction favors a bullish dollar position, sell EUR/USD with two separate lots. Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward. Move stop to breakeven on remaining position once initial target is met, set reasonable limit.
Bearish USD Trade: CPI Report Falls Short of Market Forecasts.
Need a green, five-minute EUR/USD candle to consider a short dollar trade. Implement the same approach as the bullish dollar position, just in the opposite direction.
Potential Price Targets For The Release.
EUR/USD Daily Chart.
The failed attempt to fill in the gap from January-2015 (1.2000 down to 1.1955) may generate a near-term pullback in EUR/USD especially as the Relative Strength Index (RSI) comes off of overbought territory, but the broader outlook remains constructive as both price & the momentum indicator preserve the bullish formations from earlier this year. Lack of momentum to push below the 1.1670 (50% retracement) hurdle may spark a move back towards the monthly-high (1.1910) as a bull-flag formation unfolds. Interim Resistance: 1.1960 (38.2% retracement) to 1.2042 (July 2012-low) Interim Support: 1.0980 (78.6% retracement) to 1.1000 (38.2% expansion)
EUR/USD Retail Sentiment.
Retail trader data shows 28.2% of traders are net-long EUR/USD with the ratio of traders short to long at 2.55 to 1. In fact, traders have remained net-short since Apr il 18 when EUR / USD traded near 1.06524; price has moved 10.5% higher since then. The number of traders net-long is 5.0% higher than yesterday and 5.0% lower from last week, while the number of traders net-short is 0.8% lower than yesterday and 6.0% lower from last week.
--- Written by David Song, Currency Analyst.
To contact David, e-mail dsongdailyfx. Follow me on Twitter at DavidJSong.
To be added to David's e-mail distribution list, please follow this link.
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