We have published a few articles recently in regards to Fixings and how, at certain times, the market sees increased volatility and volumes.
The media has been awash with numerous scandals around collusion, in both FX and LIBOR Fixings, and unscrupulous market practises in chat rooms etc. But how can a Bank manipulate a fix?
Let’s start off by explaining what a “Chat Room” is:
I am certain you have used Skype, Messenger, Facebook and other applications to have chats with your friends. The Chat rooms discussed in the media are not these kinds of Chat Rooms. Most trading institutions have access to Chat Rooms that are available in their workplace desktop from Reuters or Bloomberg. Both Reuters and Bloomberg provide a powerful combination of information, analytics and exclusive news on financial markets – delivered in an intuitive desktop and mobile interface. Reuters Messenger and Bloomberg Chat allow users to create Chat rooms and invite select members to join the room. As you will have read these Chat Rooms had many names e.g. The Cartel, The Mafia, The Bandits Club to name a few. The really crazy thing is that all Banks will electronically record these chats – so it makes you wonder if the Banks simply turned a blind eye?
So how can a Bank manipulate the fix?
Because many institutions want to trade at a published and transparent rate they will, naturally, pass their buy and sell orders to their Banks for execution at that days fix (ECB, WMR etc). Many Banks try to internally net off these orders i.e. match of buyers with sellers. However there are many occasions whereby the orders are all one way (all buyers or all sellers) so the Banks with these orders need to mitigate their risk. During the “Fixing scandal” numerous chat room transcripts have been disclosed where a Bank Trader asks his buddy at another Bank to take some or all of his “Fixing Position”. The following is available in the public domain but we try to explain the “jargon” used in a Bloomberg Chat Room between some large Global Banks and the ECB Fix:
• Trader at Bank A: getting 250 on ecb (means he has a client that wants to sell 250 million at the ECB Fix likely EURUSD and here the Bank is getting, or buying, them)
• Trader at Bank B: gettin 30 here (this Bank also has a client that wants to sell at the fix – but this time 30 million)
• Trader at Bank B: a 22 fix wld suit if you cld oblige mate (we don’t know where the market is trading at the time but the trader is asking his Buddy if he could push the market to trade at 22)
• Trader at Bank A: hahahahah (doesn’t need an explanation)
• Trader at Bank C: I need 65 (this trader wants to buy 65 million – most likely he has a client that wants to buy this amount at the fix)
• Trader at Bank C: or u want a lesson (a friendly threat)
• Trader at Bank A: ?
• Trader at Bank A: haha
• Trader at Bank A: 65 urs mate (Bank A has sold 65 million to Bank C – urs is an abbreviation for “Yours” meaning I sell to you)
• Trader at Bank c: ta (thanks)
The above is a real life excerpt from a transcript. The amounts may seem unreal but I can tell you I have heard Billions of EUR, USD, GBP, JPY, CHF and on and on etc. transacted during both ECB and London Fixes.
So the above shows how collusion plays out. But what about manipulation?
If we continue to analyse the transcript we know that Bank A still has a large order to execute for its client at the fix. The client wants to sell 250 million (presuming EURUSD) at the ECB Fix. So Bank A has to start to offset his risk. Depending on market conditions and the “feel” of the market the Bank may decide to wait for the fix rate – fill the client at that rate – and then trade directly into the market. Remember he would need to sell 185 (see below) million in EURUSD. EURUSD is, by far, the deepest market for Banks to trade in so selling 185 million EUR should not be that difficult but the market is likely to move against the Bank regardless. And no Bank trader wants to take a loss.
In the transcript the Bank sold 65 million to his buddy pre fixing so his exposure is now 185 million. If he can’t offload any more EUR’s to his buddy’s he is likely to start selling a few minutes before the fix. So let’s assume its 13:55 GMT with the ECB fix at 14:00 GMT. Remember the client wants to sell 250 million at the fix rate. That means the Bank is the buyer of 185 million (remember he offset some to his buddy). So the Bank is likely to aggressively sell EURUSD just leading up to the fix. I know we said that EURUSD is a deep market but before any major news announcement or fix the markets tend to be less deep (less competitive pricing and volume) so Bank A will do his best to move the EURUSD rate as low as he can by aggressively selling and/or aggressively posting large limit Sell orders into the market. Both EBS and Reuters have a depth of book whereby a bid and offer is shown with the orders volume. So a bit like bluffing a hand at poker the Bank wants the market to think there is some very heavy selling pressure. If successful the market drops on the Banks actions and the fix occurs at a low rate. Now remember the client is a seller at the fix – the bank is now a buyer at this lower fix rate from his client. It is likely that the Bank would have sold some EUR as he pushed the market lower so that gets offset against his long. Invariably the market “rebalances/retraces following such a move and therefore moves back higher – many times close to the rate before the fix. So the Bank is nicely long from an artificially created low fix and can now sell his longs at a higher price.
I welcome all our readers to Google “Fixing Scandal” where you can find more information.
Happy & Safe Trading!
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