Forex abuse: a more structured way to steal
MY father once told me never to take a bet. “If you know you’re right, you’re stealing. If you don’t, you’re a fool,” he’d say. Insider trading is theft. Buying a share in the certain knowledge that you can sell it at a profit (if you are aware of a bid, say, that’s about to be announced) is tantamount to stealing that embedded profit from the current owner who is unaware of the impending bid. Simple really, and yet it is rife. Front running is theft. Using an order that’s big enough to probably (albeit not certainly) move the price to support your own trade is front running: buy before the order starts, stand back and watch the price ramp up and then sell before the order is finished — just another form of insider trading, enabled because stockbrokers could act as principle and agent. Ridiculous, rife.
The foreign exchange markets were “exempt” from insider-trading accusations, on the basis that the volumes of both buyers and sellers were just too big for any single order or trader to manipulate the price, or for any information not to be traded into the price very quickly. Such is the nature of an efficient, liquid market, with daily volumes running into trillions of dollars.
So the forex traders in the 17 banks are being accused of price fixing and market allocation, not insider trading, per se — they found another, more structured way, to steal.
The price at which you can either buy or sell dollars with rands is known as the bid-offer spread. The principal factors that influence the width of the spread are risk and liquidity. Banks typically square off their books at the close of business so that they aren’t exposed to the risk of price movement overnight, because they’re providing a service, not taking a bet, right?
If the risk of movement is high, they need to leave themselves enough room so as not to lose money settling their open positions. An efficient market gets that gap right, all by itself.
It is therefore quite legitimate to have a wider bid-offer spread in a risky investment and likewise in a thinly traded market — which is why you get a lousy price at the airport.
Where it changes from risk management to theft is when the width of the spread is managed by the players by agreement, rather than determined by the free market, and you are able to trade out of your position, risk free, at a profit. No risk — wide spread, that’s the fraud.
And so it is that the ZAR Domination chatroom went about making a risk-free profit at the expense of their banks’ clients. All 17 of them had to be involved, otherwise an outsider could have (innocently) made a fortune inside the risk-free fortress they built.
Banks are not evil. Banks are still the pillars of our financial society and they always will be, give or take a bit of dis-intermediation. South African banks, in particular, are well managed and benefit from first-worldstandard oversight.
Traders are people. Some people are evil. Worse than that, some people regard cheating as a skill, a virtue, a part of the game. They get caught, not because we find them out, but because they brag. The tiny, incremental bits of dishonest money they make out of you and me don’t change our lives markedly. But they add up, and eventually those crooked traders can’t help showing off. It’s the same DNA that made them cheat in the first place. Lock them up! The punishment, at 10% of turnover, is serious, but not fatal. The cure will need to be structural and cultural. You can’t earn exorbitant bonuses if you just provide a service, but you should be able to earn a lot if you increase client volumes and market share. Perhaps the focus should be on turnover in forex trading, not profit.
The trouble is that, no matter what the rule is, there will always be rogue traders.