Some Thoughts on the Forex Rigging Scandal and Market Manipulation

The foreign exchange rigging scandal that is coming to light is very interesting, even in this time of financial scandals and corruption.

Here is the original Bloomberg story on it and you may wish to read it in its entirety.

The corruption in the enormous global foreign exchange market is coming to light not because of any surveillance by regulatory bodies. The multi-trillion dollar market is a genuine 'spot market' and is not considered a financial assets market, and is therefore lightly regulated.

As you may recall,  a certain liberal economic columnist asserted some years ago that it was not possible to rig the price of commodities using the futures market because the price is set in the spot market.  Well, he was wrong about that, since in those cases the spot price is a derivative of the front month in the futures. 

But with forex we do have an actual spot market, and apparently that principle does not hold even where there is an actual spot market, and of a size that most would assert that price fixing was not possible.  They forget that prices are set at the margins.

Efficient market theory dies hard because it is such a nice neat model and so attractive to the abstract mind.  That it is a mere fantasy is another matter.

The story came to light because very large customers went to the regulatory body in London and complained that they were tired of being cheated. The authority was forced to respond.

There is quite a bit of talk that nothing that was done was 'illegal.'

While that may be technically true from a regulatory perspective, there is sufficient evidence that traders from different companies were acting in concert to fix global benchmarks knowing with the intent to steal from their customers. If that is not the very definition of a criminal conspiracy I am not sure what would be.

And finally, despite its enormous size, the foreign exchange market was able to be rigged against customers because of the concentration of market power in a few hands, and the manner in which trades are placed, taken and executed.

From the Bloomberg story:

"While hundreds of firms participate in the foreign-exchange market, four banks dominate, with a combined share of more than 50 percent, according to a May survey by Euromoney Institutional Investor Plc.

Deutsche Bank AG (DBK), based in Frankfurt, is No. 1, with a 15.2 percent share, followed by New York-based Citigroup Inc. (C) with 14.9 percent, London-based Barclays Plc (BARC) with 10.2 percent and Zurich-based UBS AG (UBSN) with 10.1 percent."

We do not know what entities have been named in these revelations. These are merely the largest. We may never know depending on how the London regulators choose to dispose of it.

But it does shoot a gaping hole in the efficient markets theory. Here is a huge, widely dispersed market with literally millions of transactions affecting almost every economically involved individual in the world, and it became a chronically rigged market in a corruption scheme that went on for many, many years.

Put that in your free market neo-liberal pipe and smoke it.

I see where Singapore's regulator was threatening to reprimand the guilty parties. I submit that given the wide range of abuses and scandals that have been revealed and which are still ongoing, that there needs to be some serious action and soul-searching done about how markets are set up, what secrecies are permitted to the major players, the asymmetric distribution of information, and the invariable and pernicious, official sanctioned secrecy that marks every single financial fraud which we have seen over the past twenty years.

Secrecy is a privilege that has a limited place in markets that are honest, efficient and effective.

And I am sorry but if you still choose to believe that the markets, even very large and significant ones, are not being routinely rigged to the disadvantage of the public, then you are probably a fool, or a tool, or an obtuse, purblind ideologue.  

And that goes in spades for the precious metals and equity markets that are saturated with outsized position shoving, event driven price rigging, collusion, and high frequency front running as a normal order of business.

The Ongoing Debate Between Power and Conscience, Secrecy and Its Abuses

"At its very inception this movement depended on the deception and betrayal of one's fellow man; even at that time it was inwardly corrupt and could support itself only by constant lies. After all, Hitler states in an early edition of 'his' book:  'It is unbelievable, to what extent one must betray a people in order to rule it.'

If at the start this cancerous growth in the nation was not particularly noticeable, it was only because there were still enough forces at work that operated for the good, so that it was kept under control.

As it grew larger, however, and finally in an ultimate spurt of growth attained ruling power, the tumor broke open, as it were, and infected the whole body.

The greater part of its former opponents went into hiding. The German intellectuals fled to their cellars, there, like plants struggling in the dark, away from light and sun, to gradually choke to death."

The White Rose
Second Leaflet
Munich, 1942


"We can never forget that everything Hitler did in Germany was 'legal,' and everything the Hungarian freedom fighters did in Hungary [in 1956] was 'illegal.'

Martin Luther King


"All frauds, like the wall daubed with untempered mortar, with which men think to buttress up an edifice, always tend to the decay of what they are devised to support."

Richard Whately

I do not claim to have any particular authority in this difficult area of policy and ethics, except to note that we learn from history that this is a debate that must happen, always. Power that becomes too concentrated, that is accustomed to operating in secret, is deadly to a free society.

Individual judgment can be a dangerous thing. The great variety of people can rationalize almost any action in their private mind, whether it be a principled stand for justice, or a destructive and unjust act of violence.

As always, there is danger in the extremes.

We have seen, over and over as groups or self-defining classes of people come to power, that they can tend to rationalize actions that in retrospect were clearly not in the public interest, but largely in their own, from making their tasks more effective to lining their pockets with funds and abusing power.

Transparency, debate, and freedom of speech are the necessary safeguards that our Constitution has ensured.  This has been one of the greatest and most effective innovations in political theory.

One of my greatest ongoing concerns is the secrecy and incestuous dealing between the government and the financial sector, bonded by enormous amounts of money and mutual power. I am convinced that this corruption is impairing the real economy for the indulgence of a privileged few, who have set themselves above the people, and above the law.

So I present this debate to provoke some additional thought on the subject.

One thing I will say is that the vilification of the messenger, in this case Snowden, by the mainstream media in the States has been disappointing, and at times, almost surreal.

But why does that surprise us?  We have seen the same thing occurring in numerous whistle blower cases, including the slurs and marginalization against those who have stood up to expose corruption and fraud in the markets, even by otherwise intelligent and well-meaning people.   That is a culture of conformity, the status quo, and the enabling of a power that will, in the end, serve only itself.

I promised you that this would be a time of 'revelations.'  And that process is not done, but continues.  My greatest concern is that given enough time and official messaging that people will come to accept almost anything, and come to thrive on the spectacles of misery.  That is the Hunger Games.

Banks Manipulating Trades and Rigging Benchmarks in Foreign Exchange Markets

Are there any markets that have not been corrupted by lax regulation, and as a consequence by Banks who have been emboldened in their insatiable greed by the lack of effective enforcement of the rules and equal justice for all?

It is somewhat ironic that this news of routine price rigging comes on the revelation that Obama is replacing Gary Gensler, Chairman of the CFTC, for being too aggressive in seeking to regulate the Swaps markets and angering some foreign banks (read London trading operations of the big multinational banks). 

London has become a favored haven for corrupt financial practices such as 'the London Whale.'

I will suggest to you that this is still just the tip of the iceberg.  And for those who assert that there is no manipulation in the precious metals markets, despite all the odd price action and blatantly predatory selling raids, I would suggest that they are obviously lacking in something, exactly what I cannot say.

There will be no sustainable recovery until the impediments to honest price discovery and the pernicious tax of corruption is eliminated through greater transparency, equal enforcement of existing laws, and serious reform. 

One can seriously wonder how confident they can be that the governments of the US and the UK, and of Europe as well, are seriously committed to performing the basic function of maintaining honest markets for their constituents.  If market confidence breaks, there will be hell to pay.

Even if they hide and tolerate this corruption for the sake of 'confidence, ' markets have a significant role to play in the economy.  That function has become warped and perverted through corrupt practices, with serious real world results, which accumulate and worsen over time, with consequences that we have yet to discover.

Breaking News from Bloomberg:

"Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said. The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter..."

Obama Quietly Firing the CFTC's Gary Gensler For Pressuring Banks on Swaps

It appears that President Obama is bidding adieu to CFTC Chairman Gary Gensler, purportedly for being 'too aggressive' with the Banks over their antics in the markets, with special emphasis on swaps and derivatives activity offshore.

I wonder who put the word in President Barry's ear?  It is best to tread lightly around those treasured havens for financial piracy.

I discount any speculation that this is in reaction to a major breaking scandal on the metals exchanges. That would be too good.

The replacement is reported to be a Amanda Renteria, the former chief of staff to Senate Agriculture Committee Chairwoman Debbie Stabenow, Democrat of Michigan. Renteria was the first Latina chief of staff in the Senate.

She is the daughter of Mexican immigrant workers, studied at Harvard Business School, and spent most of her career in public service. However, after graduating she worked briefly at Goldman Sachs & Co.

She might turn out to be a highly effective regulator despite her lack of practical experience in financial regulation.  That would be a nice change of pace for a generally docile and Big Finance compliant administration.  Let's see what she has to say.  But I am not hopeful given the Obama crew's abysmal track record in financial reform and 'change you can believe in.'

Here is a link to Renteria's bio.

Here is the story as it was carried by The Huffington Post.

Common Dreams
Obama Cans Regulator Who Crossed Wall Street

Ouster is a gain for big bankers advocating lax oversight

Sarah Lazare, staff writer

The Obama Administration is quietly firing Commodity Futures Trading Commission head Gary Gensler, who ran afoul of big banks by pushing for greater government oversight.

The ouster comes in the midst of controversy over a proposed CFTF rule, strongly supported by Gensler, that would extend U.S. regulation to swaps--a kind of derivative exhange--involving firms founded or doing business in the United States. This means that foreign banks and hedge funds would face the same regulations as U.S. ones when trading in swaps with U.S. parties....

Gold Daily and Silver Weekly Charts - Is There a Run on JPM's Gold Vault, and Why?

Waiting for this economic recovery is like Waiting For Godot.

Wall Street is Pozzo and Bernanke is Lucky.

Harvey Organ provides the following commentary tonight:

"However the big news was the huge drop in JPMorgan's customer account by a whopping 217,844.96 oz. Its customer inventory rests tonight at its nadir of 136,380.611 oz or 4.24 tonnes. Its dealer inventory remains at 413,526.284 oz. but it still must settle upon contracts issued in the June delivery month which far exceeds its inventory."

Zerohedge comments: JPM's Vault Gold Drops 28.4% Overnight, Slides to Record Low

In the meantime the precious metals keep coiling, coiling, coiling...

The chart below is from Mike Kosares: The Connection Between Quantitative Easing and Gold

and from Gene Arensberg...

SP 500 and NDX Futures Daily Charts - Rampus Interruptus

The central bank of Japan gave the world the jitters overnight in their decision on how to proceed with their own version of QE.

The attempt to rally stocks back up off the lows was not successful and the rally faded into the close.

There is a short term downtrend here that has not yet been broken. It is going to be caught between the downtrend and support between 1640 and 1615 on the June futures, which will be rolling over to the next front month of September later this week.

Mark Blyth - Austerity: The History of a Dangerous Idea

Adjust to the accent and speed of delivery if you must, what he has to say is worth hearing and he is quite informative in an entertaining and lively way.

I think it is fair to say that the purpose of his talk is to demonstrate why austerity is a corrosive policy choice. And he does this quite well. In doing so he tends to ignore the roots of the financial crisis, emanating as they did from New York and London in this talk, the distortions caused by regulatory policy changes in the financial system, and the systemic frauds that followed. He does touch on this at the very end in the Q&A which is heartening.

It is not equivalent to say that because austerity is bad, therefore stimulus must be good. If only the world were so linear and simple.

The corruption of the regulatory and political process by Big Money is the bigger long term issue. Therefore he appears to take a more mechanically optimistic, model based view of a US recovery, which I think is unfortunately not correct.

I hate to say on such thin evidence but the talk sounds conventionally Keynesian. He also gives unnecessarily short shrift to the regulation of the growth and quality of credit expansion, but that is probably unfair based only on this talk. I intend to read his book after I listen to this a few more times.

I think we will see a repeat bubble and collapse in the US as we did in the tech stock and housing bubble cycles unless reform occurs. Or the long run trend of inequality will become so severe that the political system will evolve. He speaks of Germany's role in Europe quite a bit, but barely touches on China.

He used Germany's growth out of the depression as a positive model of state activism to cure unemployment. But he ignores the school of thought that this growth never became organic, and was much like a Ponzi scheme. To keep growing it had to expropriate wealth, much of it from the Jews, and engaged in wars of aggression to obtain even more resources that it could not otherwise procure. So National Socialism never really became self-sustaining. I suppose it cold have done so by engaging in the export of goods rather than of bombs and bullets, but that never quite seems to work out either. Think the industrial policies of Germany and China today.

This example has to do with government sponsored stimulus and economic management without reform, and an unhealthy concentration of power, and the the two seem to go together.

He also does not address the currency wars, and imbalances in world trade flows because of governmental policies, which are one of the greatest economic macro changes in our generation. In the past they often have been resolved by military war and the rise of empires. So we will have to see what comes next in this particular iteration of conflicts of interests.

I am not saying Mark Blyth is wrong. I am merely saying that he does not address these things because they lay a bit outside his chosen topic which is the short term dilemma being faced in Europe and the UK. I find his style refreshing and his thought process and ability to tie things together fascinating. I have listened to any number of lectures on the history of economics, and his is one that informs while not making one's eyes glaze over. And for me that is high praise. I wish I knew Mark Blyth well enough to discuss these things over a few beers. He seems like a great guy.

If one is comparing the US to Europe I would grant that it certainly looks better because their system is inherently unstable and not sustainable. And the theme or purpose of his book and talk are that austerity is doomed to failure. And I agree. But I also think that stimulus is also going to fail, unless the system that caused the problems is changed through meaningful reform.



h/t Yves