How are currencies fixed?
At set points each day the rates for the 10 major currencies are fixed. For example the sterling/dollar rate is fixed at 4pm using the WM/Reuters rate. This is fixed using actual trades in the spot market in the minutes immediately around 4pm. Clients of the banks frequently put in orders to buy or sell currencies “at the fix rate” before the fix takes place.
How do the banks make money?
A bank with client orders to buy a currency at the fix rate will make a profit if the average rate at which it buys the currency in the market is lower than the rate at which it sells to the clients. The reverse is true for sell orders, where the bank tries to sell the currency at a higher rate than it has agreed to buy from its clients. Banks can legitimately manage their currency book to try to improve the chances of this happening.
So what did rigging involve?
Because it is spot-rate trades that lead to the fix, the groups of traders who ganged together could manipulate their spot trades around the fix to ensure that when the fix was established their overall books were in profit.
The bank takes a position by guaranteeing its client a certain rate. By triggering “stop losses” and then manipulating the fix to be at a lower level (in the case of net buying orders) the bank could ensure it made a profit.
Why did the traders collaborate with traders from other banks?
Each trading desk knew its own client book, but it could not see other banks’ positions. Using emails and chat rooms they could suggest to their rivals and colleagues elsewhere in the world which way they wanted the fix to move and, if that suited the majority, ensure it happened.
So who lost?
Primarily the banks’ clients, who were paid rates for the foreign exchange transactions than were worse than the true rates in the market. Clients could be anyone from a hedge fund taking a punt to a major corporate changing money as part of a big overseas commercial transaction.
What was in it for the traders?
They did not profit individually from the rigged markets. But if their dealing desk made consistently higher profits, these would certainly be reflected in their bonuses at the end of the year.Reuse content