Each day, £3.5tn changes hands in the foreign exchange markets.
What are the foreign exchange markets?
Each week, the equivalent of a year’s global trade in physical goods takes place. The markets are open 24 hours a day, although 40% of the activity takes place in London. This is because of the city’s central position in time zones. Hong Kong dealers pass their trading to London, which in turn transfers to New York before slipping back to the Asian time zone.
Where does it trade?
There is no equivalent of a stock exchange for currencies. Dealers trade between each other, and prices flash up on trading terminals in a wide range of currencies. A price of any currency has to be set against another, say the pound, and they are known as pairs. The most commonly traded pairs are the euro against the dollar, the dollar against the yen, and sterling against the dollar.
Many of them have nicknames. “Cable” is sterling-dollar because of cable laid under the Atlantic ocean in 1858 to improve communications between the US and the UK. The “loonie” is the Canadian dollar, named after the bird.
Such is the size of the market, dealers trade in millions, and often billions (known as yards).
Why does it matter?
The prices of currencies have an impact on everyone, from holidaymakers to companies manufacturing cars or selling clothes.
How did the traders rig it?
As the markets never close, there is no single closing price in the currency markets. But when the Financial Conduct Authority fined five banks in November 2014, it outlined two points in the day – at 1.15pm and 4pm – when the prices for currencies are “fixed”. Most of the focus has been on the 4pm fix which is set on the basis of a 60-second trading period each side of the hour.
Customers give banks orders to trade at 4pm and if banks know the trading positions of their rivals they are able to work out at what price the “fix” will take place. Through chatrooms, traders shared information about their client orders and were able to influence the price.
The FCA found the traders at rival banks formed groups through which they shared information and referred to their teams using names like “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team”.
Is this like the Libor scandal?
To a certain extent. The interest rate rigging scandal increased scrutiny on other markets, although the process of manipulation was different.
Libor was set using estimates submitted by banks about what rate of interest they expected to be charged for borrowing. The currency fixes are based on actual trades.
This article was written by Jill Treanor, for theguardian.com on Wednesday 20th May 2015 13.44 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010