When global bond investors lost more than $400 billion in one week this month, Koon Chow, a Union Bancaire Privee currency strategist, asked sales contacts at banks about the impact on foreign-exchange markets. He didn’t get much help.
“We struggled to get any information from bank sales -- they were cautious about telling us who was doing what,” said Chow, who has been in the market for more than 15 years and previously worked at Barclays Plc and Credit Suisse Group AG.
Chow’s struggle to get answers shows how the industry is on its best behavior since authorities began probing allegations that the world’s biggest market was rigged. Since then, deals going through bank spot-currency desks have fallen as clients shift to electronic platforms, more than 30 traders have been fired or suspended, and those remaining are wary of communicating anything that might cost them their jobs.
The stakes are high. Citigroup Inc., JPMorgan Chase & Co., Barclays and Royal Bank of Scotland Group Plc are poised to plead guilty and each pay about $1 billion in fines over allegations they manipulated currency markets, people with knowledge of the settlement talks have said. UBS Group AG also may be penalized for its actions, and individual traders at the five banks could still be prosecuted.
“While clients clamor for market information, banks are skittish about allowing their sales representatives and traders to provide market color,” said Dan Connell, managing director at Greenwich Associates in Connecticut. “Some are looking at ways of aggregating client information that will add value while protecting confidentiality, but many feel they can’t do even this without permission from each and every client.”
Requests such as Chow’s were standard in a clubby industry that revolved around the sharing of market information between traders and their clients. At most banks, order books were visible to all employees on the desk and salespeople would routinely pass on information about deals to their best clients to curry favor and secure future business.
After authorities began looking into a Bloomberg report in June 2013 that traders were colluding with counterparts at other firms to rig currency benchmarks, banks introduced measures to clean up the largely unregulated $5.3 trillion-a-day market. They have limited what employees can see about colleagues’ trades, clamped down on what information they can share with clients, capped what dealers charge to exchange currencies and banned the use of interbank chat rooms, according to more than half a dozen sales and trading employees who asked not to be identified because they still work in the industry.
Banks also have changed how they handle orders from clients to trade at benchmark rates such as the WM/Reuters 4 p.m. fix. Deutsche Bank AG, RBS and Lloyds Banking Group Plc now segregate client requests for dealing at the fix from the rest of the order book so only the trader handling the transaction can see it. At Lloyds, dealers who take such orders sit in a separate room away from the rest of the trading floor when they execute deals. Other firms, including Barclays, JPMorgan, Deutsche Bank and RBS, either have started charging for trades at the benchmark rate or have told clients that they plan to.
After coming under pressure from regulators, WM/Reuters modified the way the rate is set to make it harder to game. In February, the width of the trading window used to calculate the benchmark was expanded to five minutes from the previous reference period of one minute.
“These are all sensible measures -- you look at them and just think why weren’t they brought in years ago?” said Joe Rundle, head of trading at ETX Capital, a London-based brokerage. “The FX market was a relic, a hangover from the good old days, when everything was floor traded and everyone met at the pub at lunchtime and traded tips. FX has been brought into the 21st century quite aggressively now.”
Most of the $3.6 trillion tracker-fund industry continues to trade at the 4 p.m. fix because index providers such as FTSE Group and MSCI Inc. use the rates to calculate the daily valuations of their indexes that the firms need to replicate as accurately as possible.
Not everyone is convinced the changes are enough to stamp out all the wrongdoing highlighted by regulators. One of Europe’s biggest money managers, who asked not to be identified, said he no longer places the bulk of his trades at the fix, preferring either side of the 4 p.m. window. He also breaks up his orders into smaller units and places them through more banks to reduce the risk traders will buy or sell ahead of his deals.
With so many traders suspended, some banks are struggling to man desks that handle spot trading, the buying and selling of currency for immediate delivery. After Barclays put six dealers on leave in London, New York and Tokyo, out of a total of about a dozen, the firm had to draft employees from other regions and businesses, two people familiar with the staffing said.
As the ranks have thinned, the average age of employees on spot desks also has fallen. Barclays promoted Daniel Ryan, a junior trader, to head the team in London after it suspended co-chief dealer Chris Ashton.
With fewer traders available to handle deals, smaller orders are being funneled through banks’ electronic platforms. At some firms, salespeople are using those platforms to execute trades directly on behalf of clients.
Electronic dealing accounted for 66 percent of all spot currency transactions this year through May, up from 55 percent in 2010, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements and central bank data. About 69 percent of spot trading will be electronic by 2018, Aite said.
While the number of deals going through the spot desks at some banks has dropped by almost 50 percent as traders focus on fewer but larger orders, the total volume of currency trading has increased since the probes began. UBS said earlier this month that a surge in foreign-exchange trading after the Swiss National Bank removed its currency cap on the franc contributed to an 88 percent rise in first-quarter profit. Deutsche Bank said in January that an increase in revenue from currency trading boosted fourth-quarter results.
For more, read this QuickTake: Broken Benchmarks