Secret Currency Traders’ Club Devised Biggest Market’s RatesLiam Vaughan, Gavin Finch and Bob Ivry
It’s 20 minutes before 4 p.m. in London and currency traders’ screens are blinking red and green. Some dealers have as many as 50 chat rooms crowded onto four monitors arrayed in front of them like shields. Messages from salespeople and clients appear, get pushed up by new ones and vanish from view. Orders are barked through squawk boxes.
This is the closing “fix,” the thin slice of the day when foreign-exchange traders buy and sell billions of dollars of currency in the largely unregulated $5.3-trillion-a-day foreign-exchange market, the biggest in the world by volume, according to the Bank for International Settlements. Their trades help set the benchmark WM/Reuters rates used to value more than $3.6 trillion of index funds held by pension holders, savers and money managers around the world.
Now regulators from Bern to Washington are examining evidence first reported by Bloomberg News in June that a small group of senior traders at big banks had something else on their screens: details of each other’s client orders. Sharing that information may have helped dealers at firms, including JPMorgan Chase & Co., Citigroup Inc., UBS AG and Barclays Plc, manipulate prices to maximize their own profits, according to five people with knowledge of the probes.
“This is a market where there is no law and people have turned a blind eye,” said former Senator Ted Kaufman, a Delaware Democrat who sponsored legislation in 2010 to shrink the largest U.S. banks. “We’ve been talking about banks being too big to fail. What’s almost as big a problem is banks too big to manage.”
At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia,” in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.
The allegations of collusion undermine one of society’s fundamental principles -- how money is valued. The possibility that a handful of traders clustered in a closed electronic network could skew the worth of global currencies for their own gain without detection points to a lack of oversight by employers and regulators. Since funds buy and sell billions of dollars of currency each month at the 4 p.m. WM/Reuters rates, which are determined by calculating the median of trades during a 60-second period, that means less money in the pension and savings accounts of investors around the world.
At stake is the integrity of a market that affects the daily valuations of private and public money alike, from the $261 billion Sacramento-based California Public Employees’ Retirement System to the $237 billion Scottish Widows Investment Partnership in Edinburgh, from the $4.1 trillion BlackRock Inc. in Manhattan, the world’s largest asset manager, to the $1.2 trillion Tokyo-based Government Pension Investment Fund, the biggest pension.
“This is a market that is far more amenable to collusive practices than it is to competitive practices,” said Andre Spicer, a professor at the Cass Business School in London, who is researching the behavior of traders.
Unlike sales of stocks and bonds, which are regulated by government agencies, spot foreign exchange -- the buying and selling for immediate delivery as opposed to some future date -- isn’t considered an investment product and isn’t subject to specific rules.
While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange swaps and forwards, spot dealing is exempt. The U.S. Treasury exempted foreign-exchange swaps and forwards from Dodd-Frank’s requirement to back up trades with a clearinghouse. In the European Union, banks will have to report foreign-exchange derivatives transactions under the European Market Infrastructure Regulation.
A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.
“If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior,” said Abrantes-Metz, whose 2008 paper “Libor Manipulation” helped spark a global probe of interbank borrowing rates. “Even a little bit of difference in price can add up to big profits.”
The currency investigations are taking place as authorities grapple with a widening list of scandals involving the manipulation by banks of benchmark financial rates, including the London interbank offered rate, or Libor, and ISDAfix, used to determine the value of interest-rate derivatives. The U.K. regulator also is reviewing how prices are set in the $20 trillion gold market, according to a person with knowledge of the matter.
“Some of these problems developed over many years without anybody speaking up,” said Andrew Tyrie, chairman of Britain’s Commission on Banking Standards and Parliament’s Treasury Select Committee. “This is remarkable. It suggests something very wrong with the culture at these institutions.”
The story published by Bloomberg News in June, based on interviews with current and former traders, triggered internal probes as banks began reviewing millions of instant messages, e-mails and transcripts of phone calls to see whether employees attempted to rig rates. The U.K.’s Financial Conduct Authority, the European Union, the Swiss Competition Commission and the U.S. Department of Justice are all now investigating.
In addition to seeking evidence of collusion, the FCA is looking into whether traders cut deals for personal profit before completing customers’ orders, according to a person with knowledge of the probe. Bloomberg News reported in November, based on the accounts of two people who witnessed the transactions, that some dealers placed side bets for personal accounts or through friends in exchange for cash payments.
At least 12 currency traders have been suspended or put on leave by banks as a result of internal probes, and 11 firms have said they were contacted by authorities. Government-controlled Royal Bank of Scotland Group Plc turned over transcripts of instant messages. Deutsche Bank AG, Germany’s largest lender, said it’s cooperating with regulators and Zurich-based UBS, the world’s fourth-biggest currency dealer, said it’s taking unspecified disciplinary measures against employees.
Britain’s FCA, which has about 60 people working on benchmark investigations, has asked foreign-exchange traders to come in for voluntary interviews, according to the people with knowledge of the probe. The individuals are among at least 40 traders whose communications are being reviewed, one of them said. The conversations being examined date back to 2004, another said. Chris Hamilton, a spokesman for the FCA, declined to comment.
The Justice Department has issued subpoenas to banks, according to three people with knowledge of the probe who asked not to be identified because the investigation is confidential.
“The criminal and antitrust divisions have an active, ongoing investigation into possible manipulation of foreign-exchange rates,” Peter Carr, a department spokesman, said in an e-mail. He declined to name any specific institutions.
EU competition commissioner Joaquin Almunia said in October the Brussels regulator’s probe into currency markets was at a “very preliminary” stage. Several banks have come forward with information on possible rigging in the hope of winning leniency, Almunia’s spokesman Antoine Colombani said in November.
None of the traders or the banks they work for has been accused of wrongdoing.
The investigations have had repercussions across the industry. UBS, RBS, Citigroup, Deutsche Bank, JPMorgan and Lloyds Banking Group Plc are banning traders from using multibank chat rooms, people at the firms said. Investors are breaking their orders into smaller units and using more banks to reduce the opportunity for front-running, one of Europe’s largest money managers said.
One focus of the investigation is the relationship of three senior dealers who participated in “The Cartel” -- JPMorgan’s Richard Usher, Citigroup’s Rohan Ramchandani and Matt Gardiner, who worked at Barclays and UBS -- according to the people with knowledge of the probe. Their banks controlled more than 40 percent of the world’s currency trading last year, according to a May survey by Euromoney Institutional Investor Plc.
Entry into the chat room was coveted by nonmembers interviewed by Bloomberg News, who said they saw it as a golden ticket because of the influence it exerted.
Regulators are examining whether discussions among the traders amounted to collusion -- if, with a few keystrokes, they were able to push around rates to boost bank profits and their own bonuses. Traders on the chat deny that, saying they were merely matching buyers and sellers ahead of the fix. That way they could minimize losses by avoiding trades at a time of day when prices typically fluctuate the most, they said.
The men communicated via Instant Bloomberg, a messaging system available on terminals that Bloomberg LP, the parent of Bloomberg News, leases to financial firms, people with knowledge of the conversations said.
The traders used jargon, cracked jokes and exchanged information in the chat rooms as if they didn’t imagine anyone outside their circle would read what they wrote, according to two people who have seen transcripts of the discussions.
Usher, Ramchandani and Gardiner, along with at least two other dealers over the years, would discuss their customers’ trades and agree on exactly when they planned to execute them to maximize their chances of moving the 4 p.m. fix, two of the people said. When exchange rates moved their way, they would send written slaps on the back for a job well done.
The conversations echo those uncovered by regulators about Libor, in which bankers promised bottles of Bollinger champagne or cash to counterparts at firms willing to help them rig the benchmark interest rates used to price $300 trillion of contracts from student loans to mortgages. More than six banks have been fined about $6 billion since June 2012, and regulators are investigating traders at half a dozen more firms.
The currency discussions were even more calculating, one of the people who reviewed the transcripts said.
Usher was the moderator of “The Cartel,” people with knowledge of the matter said. He worked at RBS and represented the Edinburgh-based bank when he accepted a 2004 award from the publication FX Week. When he quit RBS in 2010, the chat room died, the people said. He revived the group with the same participants when he joined JPMorgan the same year as chief currency dealer in London.
Ramchandani is head of European spot trading at New York-based Citigroup. Born in India, and said by people who know him to be studious and polite, he joined the bank’s trading desk after graduating from the University of Pennsylvania with a degree in economics, according to a spokesman for the school and a recruiter who has a copy of his resume. He relocated to London from New York in 2004.
Both Ramchandani and Usher were part of the Bank of England’s 27-member London Foreign Exchange Joint Standing Committee subgroup of chief dealers as of the end of 2012, according to the central bank’s bulletin. The group met three times last year to discuss matters including regulatory developments, the bulletin reported.
Gardiner joined Standard Chartered Plc in London in September as assistant chief currency dealer. He previously worked at UBS in Zurich and was co-chief dealer with Chris Ashton at Barclays in London.
Usher, Ramchandani and Gardiner were put on leave by their employers after the FCA opened its inquiry, according to people with knowledge of the matter. Ashton, now global head of spot trading at Barclays, was suspended along with five other spot traders at the bank in London and New York.
Ashton and Ramchandani declined to comment when contacted by telephone. Gardiner didn’t return messages left on his mobile phone. JPMorgan declined to provide contact details for Usher, who couldn’t be located through Internet searches or directory assistance. The bank also declined to comment about the probes, as did spokesmen for RBS, Standard Chartered, Citigroup, Barclays and UBS. Deutsche Bank said in an e-mail that it’s cooperating with investigations and “will take disciplinary action with regards to individuals if merited.”
London is the world’s biggest hub for currency trading, accounting for about 41 percent of all transactions, compared with 19 percent for New York and 6 percent for Singapore, according to a Bank for International Settlements survey published in September. About $5.3 trillion changes hands every day, BIS data show, as companies convert earnings into dollars, euros or yen and managers overseeing pensions and savings buy and sell shares around the world.
Spot currency trading is conducted in a small and close-knit community. Many of the more than a dozen traders and brokers interviewed for this story live near each other in villages dotting the Essex countryside, a short train ride from London’s financial district, and stay in touch over dinner, on weekend excursions or with regular rounds of golf at local clubs.
Spot traders simply deal with buy and sell orders and don’t need the complex math skills their counterparts on derivatives desks use to extrapolate prices. Developing and maintaining relationships are more important, the traders say.
“The foreign-exchange market has a very strong culture, in which practitioners feel more attached to each other than they do their banks,” said Spicer, the Cass School of Business professor. “It is also dominated by an extremely small group of individuals, often with strong social ties formed by working with each other at some point in the past.”
On one excursion to a private golf club in the so-called stockbroker belt beyond London’s M25 motorway, a dozen currency dealers from the biggest banks and several day traders, who bet on currency moves for their personal accounts, drained beers in a bar after a warm September day on the fairway. One of the day traders handed a white envelope stuffed with cash to a bank dealer in recognition of the information he had received, according to a person who witnessed the exchange.
Such transactions were common and also took place in tavern parking lots in Essex, the person said.
Personal relationships often determine how well currency traders treat their customers, said a hedge-fund manager who asked not to be identified. That’s because there’s no exchange where trades take place and no legal requirement that traders ensure customers receive the best deals available, he said.
Hedge-fund managers get the best prices because they trade frequently and are the most sophisticated, according to a former U.S. currency dealer. Next in line are institutional funds -- insurance companies and pension plans that get less-beneficial prices. At the bottom are firms from automakers to smartphone manufacturers that need to swap currencies to purchase materials abroad and repatriate earnings. Traders at banks take advantage of them because they know the least about the market, he said.
Eaton Vance Corp., a mutual-fund company that manages $281 billion, uses the WM/Reuters rate to value its portfolio, so the credibility of the rate as a result of rigging allegations is potentially worrisome and the firm is continuing to monitor its reliability, said Michael O’Brien, director of global trading.
While the Boston-based company has its own trading desk to make sure investors get the best prices, it uses bank traders for certain currencies, O’Brien said, adding that most customers have little choice.
“Banks are market-makers in foreign exchange, and to a large degree you can’t avoid them,” O’Brien said. “People have to trust the pricing.”
Four banks control more than half the foreign-exchange market, according to Euromoney’s survey. Deutsche Bank, based in Frankfurt, was No. 1, with a 15.2 percent share, followed by Citigroup with 14.9 percent, Barclays with 10.2 percent and UBS, Switzerland’s biggest lender, with 10.1 percent.
The WM/Reuters rates for 160 currencies, used as a benchmark by companies and investors around the world, are determined by trades executed in a minute-long period called “the fix,” starting 30 seconds before 4 p.m. in London.
The data is collected and distributed by World Markets Co., a unit of Boston-based State Street Corp., and Thomson Reuters Corp. Bloomberg LP competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.
Thomson Reuters said it “would lend its expertise to support any authorities’ investigation into alleged disruptive behavior on benchmarks.” The company doesn’t administer the WM/Reuters rates, it added in an e-mailed statement.
“The WM/Reuters benchmark service is committed to reliability and robust operational standards,” State Street said in an e-mail. “WM continually reviews recommended methodology and policies in order to ensure that industry best practices are considered.”
Aside from trading after economic events such as interest-rate cuts, 4 p.m. is the busiest time for currency dealers as customers place orders to be transacted at the fix price.
Things are even more hectic on the last working day of the month, when tracker funds buy and sell currencies with their banks. The funds say they have to trade at the fix because the global indexes they track, such as the MSCI World Index, are calculated once a day using the 4 p.m. WM/Reuters rates.
The frenzy begins an hour earlier on trading floors as dealers jockey for advantage. Bids and offers are exchanged. Slang is common. Mio means million. A yard is a billion.
Because traders promise clients they’ll get the fix price, it leaves banks open to losses if the market moves against them, one London-based dealer said. He described trading at the fix as a loss-leader that helped his firm win client business.
To make money, traders interviewed by Bloomberg News said they would share information with counterparts at other firms and trade ahead of large client orders. Most tracker funds place their orders as much as an hour before the fix, giving dealers a glimpse of possible future price movements, which they can use to take positions. Traders on instant-message groups increased their chances of predicting market moves by pooling details of their order books and agreeing to align positions at the fix, according to three people with knowledge of the practice.
Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.
Some dealers said the tactic is legitimate and necessary for banks to protect themselves from losses. Traders who agree to buy or sell at the close need to push through the bulk of their orders during the window to minimize the risk of losses from market movements, the traders said.
One large transaction can be enough to move the market. A former bank trader said that if he received an order from a customer at 3:30 p.m. to sell 1 billion euros ($1.37 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his bank’s own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.
While foreign exchange is unregulated, dealers are prohibited by market-abuse laws from trading on inside information and sharing confidential data about client orders with third parties. In recent years, banks have tightened rules on employees’ trading for their own accounts. Many require staff to hold investments for at least 30 days and obtain written clearance from compliance officials for personal dealings.
The U.S. Commodity Futures Trading Commission, which has no oversight of the spot market, does regulate foreign-exchange futures, contracts that allow companies or investors to speculate on or hedge against the price movements of currencies. Some of those contracts, such as cash-settled forwards traded on the Chicago Mercantile Exchange, use WM/Reuters rates to determine who owes what at settlement. The agency has been reviewing potential violations of the law, according to a person with knowledge of the matter.
Its chairman, Gary Gensler, who declined to comment about any investigation the agency might be conducting, said the CFTC is understaffed, with 670 employees, when more than 1,000 would better fulfill its mission.
“We need to make sure reference rates are not based on a closing price that’s manipulated,” Gensler said in an interview. “The CFTC does not have enough people, period.”
In the U.K., the government is introducing laws designed to curtail market manipulation and punish traders found guilty of wrongdoing. In April, it became a criminal offense for anyone to knowingly make false or misleading statements relating to the setting of benchmarks. Other proposals include deferring bonuses for as long as 10 years and guaranteeing rights for whistle-blowers. They stop short of recommending specific regulations of the spot foreign-exchange market.
Even if regulators were watching the currency market, there would be a question of what they’d see and whether they’d be able to identify wrongdoing, said Felix Shipkevich of Shipkevich PLLC, a derivatives law firm in New York.
“Who has the expertise to determine if there’s any potential unlawful activity going on?” he said. “There are very few people who understand the over-the-counter market.”