Why i'm not surprised : Traders Said to Rig Currency Rates

donaldduke

Experienced member
1,665 257
This was discussed in market wizards about 25 years ago:

==== Bottom line: If it weren't for the bid/ask spread, would the banks make money on their trading operations? ====
Probably not in conventional position trading in the way you think of it. However, there is another aspect of directional trading that's very profitable. Take Joe Trader. Day in. day out, he quotes bid/ask spreads and makes a small average profit per transaction. One day a customer comes in and has to sell $2 billion. The trader sells $2.1 billion, and the market breaks 1 percent. He's just made $1 million on that one trade.
==== In a lot of markets that's illegal. It's called frontrunning. ====
It's not illegal in the interbank market. He's not putting his order in front of the customer's; he's basically riding his coattails.
==== So he does the whole order at the same price? ====
Generally, the first $100 million would be the bank's. That's just the way the market is.
==== Is there any difference between that transaction and what is normally referred to as frontrunning? ====
Yes, it's legal in one market and illegal in the other.
==== That's the answer from a regulatory viewpoint. I'm asking the question from a mechanical perspective: Is there an actual difference in the transaction? ====
The real answer is no, but I'll give you the answer from a bank's perspective. When I allow you to come in and sell $2 billion in the foreign exchange market, I'm accepting the credit risk and providing the liquidity and facility to make that trade. In exchange, you're providing me with the information that you're about to sell $2 billion. That is not a totally unreasonable rationalization.
 
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Hakuna Matata

Well-known member
357 209
You can't blame the bank traders.

If a customer calls them up and says "buy me $200m USD/JPY at the fix", he is sorta obliged to act on that information on behalf of the banks stakeholders.
 
C

cablemonster

0 0
This was discussed in market wizards about 25 years ago:

==== Bottom line: If it weren't for the bid/ask spread, would the banks make money on their trading operations? ====
Probably not in conventional position trading in the way you think of it. However, there is another aspect of directional trading that's very profitable. Take Joe Trader. Day in. day out, he quotes bid/ask spreads and makes a small average profit per transaction. One day a customer comes in and has to sell $2 billion. The trader sells $2.1 billion, and the market breaks 1 percent. He's just made $1 million on that one trade.
==== In a lot of markets that's illegal. It's called frontrunning. ====
It's not illegal in the interbank market. He's not putting his order in front of the customer's; he's basically riding his coattails.
==== So he does the whole order at the same price? ====
Generally, the first $100 million would be the bank's. That's just the way the market is.
==== Is there any difference between that transaction and what is normally referred to as frontrunning? ====
Yes, it's legal in one market and illegal in the other.
==== That's the answer from a regulatory viewpoint. I'm asking the question from a mechanical perspective: Is there an actual difference in the transaction? ====
The real answer is no, but I'll give you the answer from a bank's perspective. When I allow you to come in and sell $2 billion in the foreign exchange market, I'm accepting the credit risk and providing the liquidity and facility to make that trade. In exchange, you're providing me with the information that you're about to sell $2 billion. That is not a totally unreasonable rationalization.

Yes front running is legal with FX. There is a lot of naivety out there.
 
C

cablemonster

0 0
You can't blame the bank traders.

If a customer calls them up and says "buy me $200m USD/JPY at the fix", he is sorta obliged to act on that information on behalf of the banks stakeholders.

Yeah I recall gammajammer saying if they had a 1Bn+ order it was expected that you front run it with a couple of 100m but also expected that you dont take the pi55 with it.
 

tar

Legendary member
10,443 1,313
Anyway the FX market is not really regulated or transparent like exchange traded securities , but i think the point was that this should be looked into , God knows what monkey business is going on in this market ...
 

donaldduke

Experienced member
1,665 257
Leeson tried to rig the Nikkei, looked where that got him and his bank. And the FX markets are much bigger and much more ruthless than the Nikkei.

If a bank front runs a large order it has to unwind the front running trade at some point, net effect the market trades to where it pretty much would be had they only executed the large order on its own.
 

tar

Legendary member
10,443 1,313
Leeson tried to rig the Nikkei, looked where that got him and his bank. And the FX markets are much bigger and much more ruthless than the Nikkei.

If a bank front runs a large order it has to unwind the front running trade at some point, net effect the market trades to where it pretty much would be had they only executed the large order on its own.

They unwind it with the large pending order ...
 
 
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