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2013 Scandals: Forex Scandal Raises Question of Chat Room Regulation

Least Favored in 2013: Featuring the year's shockers from Wall Street to Washington. Read Fed Policy shenanigans; Tech spies; SeaWorld tragedy; Caterpillar-China scandal; Bud Beer scandal; Bill Ackman's Herbalife; LIBOR rigging; Forex Scandal; and check out this video CEO Walk of Shame.
 


NEW YORK (TheStreet) -- Global price fixing in the foreign-exchange market is still making headlines. Regulators are now watching chat rooms, used by major investment banks, to catch crooks -- a practice many say is long overdue.

Reports of a foreign-exchange cartel surfaced in June, stating that a handful of large forex traders were colluding to manipulate benchmark rates.

The traders were employed by competing investment banks. Through the use of instant messaging in online chat rooms, they were allegedly able to coordinate trading strategies, the reports said.

The scandal rocked the investment community that had dealt with news involving the rigging of the London Interbank Offered Rate months earlier.

To shun the appearance of evil, JPMorgan Chase (JPM), Credit Suisse (CS), USB (USB), Citigroup (C) and Deutsche Bank (DB), among others, are reportedly paying closer attention to their FX traders; some traders are getting axed and interbank chat rooms may soon be banned.

The new ring of traders was known by the forex community as "The Dream Team" or "The Cartel." The team used a coordinated trading strategy to influence the closing prices of exchange rates.

A currency fix is when global exchange rates are calculated every day at 4 p.m. London time. The forex market is open 24 hours a day, but with London accounting for about 40% of the daily trading volume, its close is used for benchmark rate calculations.

There is a 60-second window at the end of the trading day when the rates are calculated. Money managers across the globe use this price fix to determine the price of portfolio assets, making it very important.

The alleged price manipulation by The Cartel can be compared to what is known in the U.S. as "marking the close." That is when a large trader artificially influences a stock's closing price in a direction that unfairly benefits the trader.

The forex trading pool allegedly colluded via private message boards to discuss positions and orders on their books.

Knowing each other's positions, the traders allegedly devised a strategy leading into the 60-second price-fix window that would be profitable for their price fills. The traders would front-run client orders as well as push through a large volume of orders to manipulate the closing benchmark prices.

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