Currency dealers in London gave information about client orders to day traders who then made bets on their behalf, sidestepping restrictions on personal trading, three people with knowledge of the practice said.
Bank employees used their mobile phones and instant-messages to transmit details of impending orders to individuals working from rented trading desks in offices on the outskirts of the U.K. capital, according to three traders who said they had witnessed the practice over a period of years. The day traders then made bets on the direction of currencies and any profit was later divvied up in cash, said two of the people, who asked not to be identified because the agreements are private.
The practice shows the extent to which dealers would go to circumvent rules designed to stop them from profiting at the expense of clients, and how alleged wrongdoing in the foreign-exchange market stretched beyond the trading floors of London’s financial district to unregulated day traders in Essex and Kent.
“It’s almost impossible for banks to have a lid on it –- unless they find a way of controlling all forms of communication out of the trading floor,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics.
Regulators around the world began investigating the $5.3 trillion-a-day foreign-exchange market after Bloomberg News reported in June that employees at some firms said they shared information about their positions with counterparts at other banks through instant messages and sought to manipulate the benchmark WM/Reuters rates.
Britain’s Financial Conduct Authority has since widened its probe to examine whether traders also placed bets on currency moves through their personal accounts, according to another person with knowledge of the matter, who asked not to be identified. David Cross, a spokesman for the London-based watchdog, declined to comment on its investigation.
Dealers in the U.K. are prohibited by market-abuse rules from trading on inside information and passing on confidential data about client orders to third parties, according to Janine Alexander, a lawyer at Collyer Bristow in London.
In recent years, banks have tightened rules on employees’ trading for their personal account. Many require staff to hold investments for at least 30 days and obtain written clearance from compliance officials for all personal dealing.
To bypass those restrictions, some staff have resorted to enlisting others outside their firms, often former traders with experience in the industry, two of the people said.
A trader in receipt of a large client order likely to move the market would contact the day trader and tell them to buy or sell a particular currency at a certain time, according to the people with knowledge of the practice. The bets would typically only be placed for a few seconds or minutes, long enough for them to reap a profit, said the people.
One of the people said that, weeks after one profitable trade, he witnessed a day trader handing over an envelope filled with cash to an acquaintance, another currency dealer, in the parking lot of a bar in Essex. The person declined to identify the people involved.
The FCA is working with regulators including the U.S. Department of Justice and the Commodity Futures Trading Commission to investigate the potential manipulation of the foreign-exchange market. At least seven banks including Britain’s Barclays Plc, HSBC Holdings Plc have disclosed investigations by regulators and four more said they are cooperating with the inquiries.
Regulators worldwide are reviewing the integrity of a range of financial measures after five firms were fined about $3.7 billion for rigging benchmark interest rates, including the London interbank offered rate. The FCA is also scrutinizing benchmarks used in the gold market, a person with knowledge of the matter said this week.