Aim! Fire! Why media focus on FX price rigging misses the target


FX Price Rigging-The Fix Ain’t in

Bloomberg posted a story last night ( Currency Spikes at 4pm in London Provide Rigging Clues) alluding to price fixing by foreign exchange traders around the month end 4 pm London close ( in Canada, it is known as the 11:00 am fix) implying that the pattern is similar to the Libor price fixing scandal.  I call “Bogus”!

I have been an active participant from both the sales and execution sides of these transactions while working for leading global banks and I can say from experience that this story is merely an attempt to create a controversy where none exists.

The month end London close (for book keeping purposes, determined to be 4 pm) is when the WM/Reuters rates for 160 currencies are published.  According to the Bloomberg story, the methodology is that the prices for the 21 most active currencies are derived from an average of all transactions for one minute, beginning 30 seconds before the hour.

The reason that this is important is that many fund managers all over the world use these rates to “close their books”  at month, quarter and year end.  Portfolio’s are rebalanced as FX price fluctuations during the period can result in a portfolio manager being under or overweight a currency, necessitating an FX trade to bring the portfolio bank into line with their internal parameters.

What makes it interesting is that there are literally thousands of portfolio managers in this position resulting in some very large, market moving rebalancing trades.  The Bloomberg story begins with what they insinuate is an example of a currency manipulation trade in the Canadian dollar, on the last Friday in June.

I am pretty sure that they are wrong based on over 20 years of executing the fix transactions and working directly with some of the biggest portfolio managers in the business.  The trading around the “fix” is less an example of price fixing but more of an example of profit preservation in what is a pure supply and demand environment.  The following is a simplistic example of a typical fixing trade using USDCAD.

For the rest of the article please go to Saxo Banks’s Trading Floor

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