Forex Probes: Shift in Power from Institutional to Retail Traders?

There’s no denying that regulatory agencies have been stepping up their game when it comes to probing into allegations of market manipulation among large forex firms and investors. In particular, industry watchdogs continue to investigate rate-rigging practices which involve traders executing trades before the WM/Reuters rates are set.

What’s interesting is that authorities are trying to track down “The Mafia” of forex traders who apparently colluded with other dealers through secret instant messaging groups in order to push market rates in their favor. Other IM group names include “The Cartel”, “The Bandits’ Club”, and “One Team, One Dream”. Quite cheesy enough to make Don Vito Corleone turn in his grave, huh?

In the past few months, more than 30 institutional traders from large firms have been either fired, suspended, or taken leave as regulators cracked down on rate-rigging allegations. Barclays and UBS, for instance, have suspended at least half a dozen employees accused of market manipulation. Industry experts estimate that the world’s largest banks have around 80 to 160 traders responsible for determining currency spot rates, which implies that the recent reduction constitutes a considerable chunk of the workforce.

“That explains the lack of liquidity in the market, and why what would normally be considered a small trade can actually push the market around more than normal,” remarked Brad Bechtel, managing director at Faros Trading LLC in Connecticut. Now that’s an interesting twist for retail traders like you and me.

Continued forex probes, which might lead to a greater exodus of guilty institutional traders, could eventually translate to even lower liquidity. And as my counterpart of Spidey’s “With great power comes great responsibility” quote goes… With low liquidity comes high volatility!

A few weeks back, I wrote about declining trade volumes as the summer months roll along and its potential impact on market volatility. I did mention though that there could be other factors that might still lead to huge forex moves here and there, and this just might be it. In this case, speculative or non-commercial positioning among retail traders could have a larger impact on price behavior.

Do you think we’ll see volatile movement in the coming months? Don’t be shy to share your thoughts in our comment box!