Former FX fund manager here. I believe the allegations.
What happens is that most derivatives like options or variance swaps are tied to the daily WM/Reuters fixing in the London afternoon. There's a bunch of different types of derivatives, but the thing about most of them is they have some sort of characteristic where the price dependency gets highly nonlinear towards an expiry.
So this means that someone who had a moderately sensitive position on one day might have an extremely sensitive position a few days later.
To the point where it might make sense to make sure the price doesn't hit a certain level at the fixing, by doing a bunch of trades in the spot market leading up to the fix. Or conversely by making sure it does hit some level by ramping up the price.
Now you might think it's all more or less a wash, because someone is gonna have the other side of that derivative, but that's not the case. The banks tend to have the same sides of the trades against their customers, because the customers are mostly all after certain payoff schemes.
Apart from there being a motivation, I also believe the allegations because I've been told the actual positions on certain days. You'd have these days where nothing was happening at all, and then just before the fix the price would ramp, or the price would be moving but the graph would have a weird flat ceiling. So you'd call the brokers and ask him WTF happened, and they'd say something like "XYZ bank has a huge barrier there", or "Bank X has wants to knock out this level".
It's very apparent to anyone who looks at any product that has a fixing, I've traded several (Swaps, FX, Equity Derivs). You start by thinking it's just noise and there's always someone in the office who will say that, but after a while you get suspicious of it happening at the same time, plus you have the broker rumours lining up. It would be great if the free market were restored.
Similar case in the rates world is LIBOR fixing. It's an outdated scheme that managed to escape regulatory attention for a very long time. By design there is a trust issue yet so much of the global financial system depended upon it. I have left finance years ago, but there was a movement to move away from LIBOR as funding index. I'm not sure if that ever happened.
Fwiw, from an outsider's perspective, I hear more and more grumbling about LIBOR, lately. Disilliusionment with it is reaching the main stream, for better or for worse.
LIBOR met the mainstream decades ago, in the 80s and 90s a nice guideline, and ended up pre-financial crises with adoption of financial models that balanced on the edge of single basis points that depended on a single digit that a not very well paid team calling traders, that might or might not answer their phones, and might or might not care to give an accurate number, but when a number it was not to single basis-point accuracy, just a number from the floor.
The people playing with complex quantitative systems that depended on single basis points had no idea of the integrity of the data they were playing with if they were using LIBOR.
The conclusion I got was: Get out of your code and check your data and how much you trust it. Then get back in with a whole load of caveats.
The less you have those, the less efficient your market is. "Free markets" aren't these magical things that arise on their own in nature. They are carefully crafted and maintained artificial environments and most are far from efficient.
Market forces are not a silver bullet that will solve all problems if we just sit around and wait long enough for the invisible hand to do everything.
Many would include trust, non-collusion and other acts to be against the concept of free market/trade.
Although some would draw the line at different locations, but anti-trust, collusion, patents etc. part of the system. It's just a matter of how much to limit either the government and public good vs. the corporations.
In this case, collusion in trade is obviously a violation of anti-trust law.
"Now you might think it's all more or less a wash, because someone is gonna have the other side of that derivative, but that's not the case. The banks tend to have the same sides of the trades against their customers, because the customers are mostly all after certain payoff schemes."
Thanks for clarifying. That was really confusing me because it did sound like it ought to be a wash.
The other thing is: is this illegal? I am assuming there are no insider trading laws that apply to FX because there is no fiduciary duty to a currency.
>You start by thinking it's just noise and there's always someone in the office who will say that, but after a while you get suspicious of it happening at the same time
I felt the same way when I used to watch bitcoin. It's the coherency that is oddly convenient.
Hey could you recommend some books for me to read to better understand what you’re talking about and have a similar level of comprehension of financial matters such as this
> "Former FX fund manager here. I believe the allegations."
I believe the courts agree with you. That is, per the second paragraph, this is not new news, simply a new lawsuit (by entites that opted out of the previous suit).
What happens is that most derivatives like options or variance swaps are tied to the daily WM/Reuters fixing in the London afternoon. There's a bunch of different types of derivatives, but the thing about most of them is they have some sort of characteristic where the price dependency gets highly nonlinear towards an expiry.
So this means that someone who had a moderately sensitive position on one day might have an extremely sensitive position a few days later.
To the point where it might make sense to make sure the price doesn't hit a certain level at the fixing, by doing a bunch of trades in the spot market leading up to the fix. Or conversely by making sure it does hit some level by ramping up the price.
Now you might think it's all more or less a wash, because someone is gonna have the other side of that derivative, but that's not the case. The banks tend to have the same sides of the trades against their customers, because the customers are mostly all after certain payoff schemes.
Apart from there being a motivation, I also believe the allegations because I've been told the actual positions on certain days. You'd have these days where nothing was happening at all, and then just before the fix the price would ramp, or the price would be moving but the graph would have a weird flat ceiling. So you'd call the brokers and ask him WTF happened, and they'd say something like "XYZ bank has a huge barrier there", or "Bank X has wants to knock out this level".
It's very apparent to anyone who looks at any product that has a fixing, I've traded several (Swaps, FX, Equity Derivs). You start by thinking it's just noise and there's always someone in the office who will say that, but after a while you get suspicious of it happening at the same time, plus you have the broker rumours lining up. It would be great if the free market were restored.