What Is the Forex ‘Fix'?

The huge amount of liquidity in the forex market should make it very difficult for forex traders to manipulate the market for their own benefit. However, there is a growing body of evidence that this may indeed be happening. In the same way that traders at banks colluded to fix the LIBOR rate, it seems that some traders may be exploiting something known as the forex ‘fix’ to drive profits at the expense of other investors – including their own clients.

To understand how they can do this, it is important to know what the forex ‘fix’ is and how it works. While currency rates fluctuate during the day, it is necessary to have a fixed benchmark rate so that the value of investment portfolios held by large institutions – such as pension funds and money managers – can be valued. To do this, a benchmark rate for 21 major currencies is set in London each day at 4 PM. This is calculated by taking the average level of all trades for a period of one minute, starting 30 seconds before 4 PM and finishing 30 seconds after. These rates are known collectively as the WM/Reuters benchmark rates – this is the forex ‘fix’.

The way that traders are alleged to take advantage of the forex ‘fix’ is by buying or selling aggressively within this 60-second window. For example, if they have a large order from a client to sell 500 million euros at the close, this could create a short-term downward movement in the value of the euro. This dip is an opportunity for the trader to short the currency, selling high and then buying back on the dip to make a profit. If they establish a short euro position for 100 million euros by 3:45 PM and then sell the client’s 500 million euros at 4:00 PM, then a dip of as little as 10 pips can give the trader a profit of $100,000.

Of course, it is still questionable whether a single trader could move the market this way with a trade for a single client. However, they can stockpile trades to increase the volume that they can dump on the market at the fix, which will magnify the effect. Worse still, there have been allegations that some senior traders have shared proprietary information about their upcoming trades with other traders using online messaging groups. If this is the case, they would be able to combine forces and move the market even further.

Of course, these sorts of tactics are not without risk – for instance, a currency could spike just prior to the ‘fix’, leaving the trader scrambling to cover their position. However, what is interesting is that right now this type of trading is not illegal. Unlike the stock market, where similar practices are heavily penalized, there is no corresponding regulation today in the forex market. These types of practices are coming under increasing scrutiny by financial regulators around the world, but to date changes to regulations have not been forthcoming.