LIBOR ain’t the only thing manipulated
Posted by John Forman in Global Economy, Market Commentary, tags: alternative investment, currency trading, Finance, foreign currency, Forex, LIBOR, money manager, trading
There is a massive amount of attention being given to LIBOR these days. The London Interbank Offer Rate is something the majority of folks probably never heard of, but now it’s front page news. Really, the financial industry didn’t need this latest indication of greed and corruption added to the laundry list of the last few years, even if many folks in the business where under no illusions that LIBOR was cleanly derived each day. There may have been no actually damage done (one blogger I read ran some number suggesting that any given back could only influence LIBOR by something like a tenth of a basis point – meaning 1/1000th of a percentage point), but the banks are rightly being slapped with fines for their funny business.
LIBOR isn’t the only rate that gets played with, though. And I’m not just talking about overnight interest rates for other currencies (EURIBOR, etc). There are fixings multiple times per day in the forex and gold markets (and probably others I’m not aware of). The main ones for exchange rates are at 8:55am in Tokyo and 4pm in London. These fixings are to set the exchange rate for commercial transactions.
Now, the forex market fixings are different than the survey type approach of LIBOR, but that doesn’t mean they cannot be subject to shannanigans. The London afternoon fix tends to be the more important as it comes in the US morning and near the end of the European trading day. That makes it a major focal point for activity from the two biggest trading regions. As a result, it is not unusual at all to see some dramatic moves in the forex market heading up to 4pm London/11am NYC, move that can reverse rapidly after the fix time passes. It’s not hard to imagine market players buying or selling to move the rate toward where they want it at the fix, then unwinding those trades immediately after. It’s rather like the process of running stops.
There are also key times related to options and futures expirations. The 10:00am NYC currency options daily expiration is the most noteworthy of them (Click here for more info). This is not as big a deal on a day-to-day basis as the London fix, but on days when there is a particularly large volume of options expiring in a certain currency pair there can be some interesting price activity. This is seen to be driven by those either trying to defend a strike price (keep the market from going there) or get the market to hit that strike.
As I said, these market manipulations aren’t the same as those related to LIBOR. They will never be prosecuted, because the parties trying to move prices around are actually taking some risk in doing so (what if the market moves against them?). That said, it very much behoves the forex market participant, especially one operating in shorter time frames, to be aware of these key times of day and what can happen around them.
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