UK SFO Launches Criminal Probe into FX Market

The SFO is following regulators and law-enforcement bodies in the US with its investigation, which centers on alleged collusion and market abuse surrounding the determination of the 4 PM London "fix". The fix is a benchmark calculated in a 60-second period around 4 PM, which gives a reference price to the FX market.

Many corporates request that large orders be transacted at the fix price, however there has been concern that traders at the large dealing banks have worked together in multi-dealer chat rooms to affect the price set in order to benefit their own institutions, a practice known loosely as banging the close.

"The manipulation of the London 4 PM fix doesn't just affect banks and traders, but the man in the street as well, as it is our pension and insurance funds that could be swindled out of millions of pounds by this," says professor Mark Taylor, dean of Warwick Business School, and a former FX trader. "If some of the big players in the market got together and put through some very large trades ─ billions of dollars each ─ then that could affect the market, so they can charge their clients a higher rate before covering it a few minutes later to make a healthy profit. You only have to move the market a small amount for a short period, and that could be worth millions of dollars for the banks. Collusion between traders to move the fix will be difficult to prove, but the chat rooms used by traders could be the key for investigators."

The FX market is the largest in the world, with some $5.3 trillion changing hands per day. It operates on a decentralized, 24/7 basis, making it hard to enact appropriate controls, and has largely run in an unregulated fashion until various scandals in recent years have forced regulatory and legal scrutiny onto the practices of dealers at the major investment banks, which account for vast swaths of trading activity. Many banks have been fined in recent years for attempts to rig the London Interbank Offered Rate (Libor), along with other benchmarks, while the UK Government has announced an in-depth review into future regulation of the market.

In response to the actions by regulators, most tier-one investment banks have banned multi-dealer chat rooms. The SFO is separately prosecuting 12 individuals in connection with Libor offenses.