FX-Rigging "Triangle" Cartel

The cat is out of the bag and it’s no longer a conspiracy theory. Every trader and his dog knows that the Forex rigging is part of the show.

The players on the FX-rigging “triangle”, reads like a list of the who's who of titans. On one side of the triangle is the world's largest bank, JP Morgan with global assets under management greater than the Gross Domestic Product of Spain and on the other side, one of the world's largest energy companies, British Petroleum.

Amongst Forex traders, the members of the “triangle” are better known as the “Bandits club”. What we have learned from recent legal actions is that JP Morgan may not have been alone. In fact numerous other banks were also involved in the free for all fiasco. However, the main player was America's largest bank, JP Morgan. With deeper pockets than any other rival bank it was able to outlast any margin call. That means it could profit from the trades while its small rivals were unable to meet the margin calls, and were liquidated out of the trade.

The scoop story revelations of the FX-rigging "triangle" cartel were made by Liam Vaughan at Bloomberg. He managed to link private sector companies that have no direct banking operations, yet have intricate professional trading exposure; banks and even central banks to the scandal.

How did this-rigging triangle work?

The scam begins with a number of spot traders working for British Petroleum (BP). When BP makes a currency transaction due to the sheer monetary value of the transaction, it makes a splash. With revenue of almost $400 billion last year and operations in about 80 countries, BP trades large quantities of currency each day. Traders at the company regularly received valuable information from counterparts at some of the world’s biggest banks -- including tips about forthcoming trades, details of confidential client business and discussions of stop-losses, the trigger points for a flurry of buying or selling -- according to four traders with direct knowledge of the practice.

So being privy to BP trades before they are actually transacted on the foreign exchange market would be akin to knowing the pin number to a cash card with an infinite bank balance. Having access to this price sensitive information meant an endless amount of win-win trades for the "triangle", who now had a glimpse into potential market moving trades before anyone else.

In an undated message seen by Bloomberg News, a trader at a bank told BP he would be buying U.S. dollars against Australian dollars at the WM/Reuters fix at 4 p.m. in London, the one-minute window during which traders around the world exchange billions of dollars of currency on behalf of pension funds and asset managers. The message was received at BP about 30 minutes before the fix. By tipping his hand, the sender was telling BP about a potential fall in the Australian currency

According to their website, BP's Forex traders were engaged in managing the firm’s exposure to financial risks, including fluctuations in interest rates and foreign exchange. But in practice BP's Forex traders were in reality operating as a “profit centre,” they shorted and longed the market with the sole aim of making profits, a kind of hedge fund, underneath the umbrella of the world's largest oil company.

So what’s wrong with that? After all, the main function of a business is to make profits.

Well the contemptuous issue being that BP's energy operations were just a balance sheet funding cover. What its FX traders did in the front office was trade, not on behalf of the business foreign exchange requirements but instead just for profit. So it was just like any professional trading desk or hedge fund anywhere else in the world.

Moreover, traders did so in collusion with a small group of market rigging players all located at the biggest market-moving banks around the globe.

Unlike most corporations, it is also run as a profit centre, which means that in addition to hedging risks, traders can place their own bets on the direction of markets.

The cartel consisted of the big four banks which controlled approximately 45 percent of the global spot-currency market, according to a survey by Euromoney Institutional Investor Plc. In other words, the cartel was able to fix prices. So having a seat at the cartel’s table and knowing their future plans would be extremely valuable. Some days they worked together to push around the 4 pm fix.

The Cartel chat room was set up by Dick Usher, head of Forex at JP Morgan in 2009. In the chat room traders would discuss their positions and how they planned to execute them. Sometimes they also agreed to work together to push exchange rates around to boost their profits, this practice is known as “double-teaming”. The "cartel" would stoop in order to make money for its members on a daily, risk-free basis.

The two dozen traders in BP’s treasury trading unit are housed above a Porsche showroom on the second and third floors of the company’s office in Canary Wharf, an area of reclaimed docklands three miles east of the City of London, the historic financial district. The building is just two blocks from JP Morgan. Talk about ‘heard it through the grape vine’.