Money Stuff: A Whistle-Blower Gets a Big Payday

A few years ago, Bank of New York Mellon Corp. paid hundreds of millions of dollars to settle charges over a foreign-exchange scandal.[1] The scandal was pretty simple. Some of BNY Mellon’s customers—companies and investors who used BNY Mellon as a custody bank and who used its “standing instruction” foreign-exchange product—would come to it during the day to convert currencies, say, to sell euros and buy dollars, or vice versa. At the end of the day, BNY Mellon would do the conversion; it would give the customers their dollars, or their euros. BNY Mellon would do this for free: The customer would get the interbank rate for converting dollars to euros, and BNY Mellon would not add any extra spread or commission.

Except there was a catch. The customer would not get the interbank rate at the time it put in its order, or the interbank rate at the end of the day. It would get the worst interbank rate of the day. If on a particular day the euro traded as high as $1.135 and as low as $1.125, everyone converting euros to dollars would get filled at $1.125, and everyone converting dollars to euros would get filled at $1.135. BNY Mellon would pocket not the tiny customary bid/ask spread in the interbank market, but the much larger spread between the highest and lowest prices of the day.