Corruption at the top of the Interbank Network
Six of the 7 largest players in the interbank network have been implicated in an interest rate-fixing scheme that has gone on for years. This scheme, involving the London Interbank Offered Rate (LIBOR), is alleged to have manipulated the key interest rate on which virtually all other interest rates worldwide are based.
The effect of this manipulation on the borrowing costs of credit card holders, homeowners, businesses, cities, states, provinces, and nations will be easy to ascertain.
The effect on the foreign exchange market may be less obvious, and more difficult to expose.
Here are three articles on this unfolding scandal --- Here, Here, and Here
This quote (from the first of the 3 articles linked to above) is pretty scary:
"Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton administration and now chairman of Sonecon, an economic advisory firm, warned Wednesday that the LIBOR scandal could become the largest financial fraud in history."
Here's a very quick summary of where we (retail forex traders) stand in relation to the mega-banks which make up the interbank network.
When you place a trade, someone somewhere takes the other side of your trade. If you are LONG, that "someone" is SHORT, and vice versa. In the case of small retail traders, that "someone" is almost never one of the mega-banks. However, the BID and ASK prices presented to you, on which you (and that "someone") decide to transact a trade, are determined in the interbank network, by the moment-to-moment trading between the mega-banks in that network.
If your retail forex broker is a so-called "ECN broker", then the interbank BID/ASK prices will be presented directly to you. On the other hand, if your retail broker is an STP broker, or a market maker, then your broker will mark up the interbank BID/ASK prices and present the marked-up prices to you.
But, regardless of the type of broker you use, the prices which your broker presents to you --- prices on which you can trade --- originate in the interbank network.
So, who are these mega-banks that comprise the interbank network? They are the 100, or so, largest banks in the world.
But, foreign currency trading volume --- and, therefore, the power to push currency prices --- is concentrated in the hands of the 10 biggest mega-banks. Collectively, these 10 banks transact 78%-80% of all the foreign currency turnover ($4 trillion per day) in the world.
The list of top 10 banks doesn't change much from year to year; the changes which do occur are usually just a minor re-shuffling of positions within the rankings.
Here is the current list of the top 10 banks, showing each bank's share of the $4 trillion per day market ---
Data source: EuroMoney FX Survey 2012 -- Graphic: courtesy of Wikipedia
And here is the same list with arrows marking the banks implicated in the LIBOR rate-fixing scandal ---
If these 6 banks (and possibly others not yet identified) are guilty as charged, how has this affected the market that we trade on a daily basis?
We would like to believe that a combination of competition and regulation ensures a measure of honesty and transparency in the forex market. But, we aren't naive.....
We know that the mega-banks manipulate forex prices --- for very short periods of time --- in order to run stops and trigger price moves.
But, now we have to ask: Has the manipulation of the LIBOR rate, which has been going on for years, created totally artificial prices --- extending over long periods of time --- in the foreign exchange market?
And if so, who benefited from that price manipulation, and who got hurt?
We can be sure of one thing: The mega-banks are sharks, and sharks very seldom get hurt.
SHARKS ARE CIRCLING