How the Forex Market Can Be Manipulated
Almost anyone who knows anything about the Forex market knows that it is constantly in flux. The many participants and factors at play mean that no single party can predict where the market will go next. There are no single parties who can control the market and thus, there are no rigging techniques. However, there are ways in which the forex market can be manipulated. Let’s look at some of these techniques. There are many people involved in the forex market, but how do they affect the overall price of the currency pair?
If you’ve ever wondered if the WM/Reuters Fix for Forex market manipulation is real, you’re not alone. Many traders have accused the banks of coordinating their actions through online chat rooms, and submitting large orders during a brief 60-second window. These large orders impacted the benchmark’s calculation and created profit opportunities for firms. Regulators found that forex traders had been colluding for years to place aggressive orders – commonly known as “banging the close.”
Those who suspect a bank of rigging the WM/Reuters Fix have been proven wrong. The WM/Reuters Fix is a set of median rates calculated using a sample of rates from all banks, including the biggest ones. This means that even the largest banks can’t know the exact net position of a fix. As such, the banks are required to break large trade volumes into smaller units and submit to an order matching system to determine whether their orders were legitimate.
However, this isn’t a complete answer. There are still cases of manipulation, but they are far less frequent than the other kinds. While many forex traders have admitted to engaging in collusion, it is not clear how much influence a single trader can have over the market. In addition to this, the foreign exchange market is so large and competitive that it’s hard to influence the price of currencies. Despite its popularity, some fund managers prefer to use the WM/Reuters rates over individual bank quotes. This is a much more convenient and cheaper way to trade than comparing individual banks. Further, dealers who agree to trade at a fixed rate are also offering a service to investors by taking a risk.
Recent market events have fueled investor ire against banks. Even though the financial crisis has still not completely healed the wounds, the media has been littered with stories of banks’ unscrupulous behavior. Libor setting scandals, insider trading convictions, and data releases sold to HFT speculators without disclosure have shaken investor confidence. Meanwhile, the WM/Reuters Fix is the average price at a one-minute window at 4:00 pm in London. Researchers are studying how the price moves around the time of fixing. Regulators have accused banks of colluding with each other to manipulate the benchmarks.
Pumping and dumping
In the Forex market, pumping and dumping are a common practice that makes every rise and fall in the market questionable. Even genuine investors would have no way of discerning a pump from a dump. Hence, it is essential to recognize a pump and dump before it occurs and take appropriate action. Several things should be considered before investing in the Forex market, including your time frame and risk appetite.
Before the internet, pump and dump scams were typically conducted by cold calling potential buyers. However, with the increasing use of social media and email, pump and dump scammers now have an even larger reach. They regularly post ads on social media and in your email inbox, where they claim to have insider information about companies. Beware of these ads! Unless you’ve had the courage to expose a pump and dump scam, you might be a victim.
The most common example of pumping and dumping in the forex market can be seen in cryptocurrencies. Pumping, where users buy a currency when it is on a rise, then sell it as soon as it starts to decline, happens when the crowds buy it. The price then returns to its pre-pumping level. In the case of bitcoin, for example, the pumping and dumping happened at the end of 2017, when the currency was hot and had no legal status in many countries.
Traders who want to profit from a pump and dump scheme will usually wait for a trend to reverse. They will sell slowly so as not to spook potential buyers. However, once the momentum has ceased, the day traders will jump on it and take advantage of the opportunity to sell their positions. These traders will then sell their short positions before the market continues to climb. With a successful pump and dump scheme, you’ll be able to earn huge profits while earning a profit.
Spreading false information
Many traders have lost significant amounts of money after being cheated by spreading false information on the Forex market. This practice is widespread among retail investors, and it can result in large fines and jail time. While a short squeeze is not illegal, spreading false information to create one is. However, this tactic hurts short-term and long-term traders alike, since it distorts market fundamentals. Let’s take a look at some of the common examples of people spreading false information on the Forex market.
First of all, what is fake news? It is simply a piece of information published on the internet and spread by social networks. The goal of these firms varies according to the platform they use – some aim to garner views on social media pages, while others want to spread hatred and discord among institutions. The majority of this fake news comes from the dark web, which is an unfiltered area of the internet that cannot be accessed by search engines.
Painting the tape
One way to manipulate the Forex market is to use a practice known as “painting the tape.” The term refers to coordinated trading that is conducted in an attempt to artificially increase or decrease the value of a security. It is a type of market manipulation that is prohibited by the Securities and Exchange Commission (SEC). Many types of trading are involved, including speculating, short selling, and trading in the open.
A common example of this kind of manipulation is the use of ticker tapes. This is done in an attempt to make it appear as though heavy activity is occurring in one side of the market. When you do this, you’ll end up losing money in the process. In the Forex market, it’s considered illegal. Here are some of the ways you can avoid the risk of “painting the tape.”
One of the most common ways to avoid painting the tape is to buy large blocks of a particular security. This tactic is effective because it creates artificial demand. This artificial demand also drives the price up since it can create large volume spikes. It’s important to understand how to recognize a fake stock or fake trader and avoid it at all costs. However, painting the tape isn’t the only form of manipulation in the Forex market.
Another common example of “painting the tape” is when manipulators try to increase a security’s price just before the market closes. The closing price is widely reported and closely watched by investors. Therefore, manipulators use closing prices to manipulate the market and create an artificially high value. For example, when a stock is selling for a lot and a large portion of it is traded, an HFT will use closing prices as a target to increase the price.
Collusion with retail traders
In a lawsuit filed against two major banks, the government alleges that traders at these banks colluded to manipulate FOREX benchmark rates. The collusion allowed the banks to profit at the expense of customers, and it violated anti-competitive practices. The lawsuits also claim specific breaches of state business laws, which prohibit restraint of trade. To overcome potential defenses to this case, the plaintiffs cite fraudulent concealment of the traders’ conduct.
The banks are accused of colluding with retail traders by agreeing to place orders at a specific time. Traders also shared confidential information. The collusion occurred in both active and implicit ways, with traders gaining more profits as a result. Traders should not exchange commercially sensitive data with each other if it could hurt their trading. This collusion, however, was never detected. It is not clear exactly what type of collusion took place, or how it was accomplished.
As a result of this scandal, the five largest banks with large Forex operations have suspended or placed 20 currency traders on leave. In addition, a Massachusetts pension fund has filed a class-action lawsuit against 11 banks, alleging damages for the currency manipulation. In the meantime, at least 12 regulatory agencies are investigating the matter. While the investigation is ongoing, no traders have been directly implicated in the collusion, but stiff penalties may be coming for the worst offenders.
The investigations involve major banks and regulators in Europe and the United States. These banks have agreed to pay a combined €3.4 billion to settle the case. Several other banks have also been penalized. The Swiss Competition Commission and European Commission are currently conducting investigations. Several traders have been suspended or fired because of internal inquiries and have been fired as a result of the scandal. There are still other allegations, including the use of fictitious names.