The foreign exchange rates are constantly manipulated due to hoards of reasons. Most of the news reports, claims the manipulation of exchange rates, as a simple case of ‘Front running’. Front running could be defined as a method by means of which foreign exchange traders can out forward their orders before their clients, knowing the fact that their client’s order would eventually move to the rate of their advantage. Again, there are claims that traders are placing large orders in order to move the foreign exchange market to manipulate WM/Reuters’ foreign exchange benchmark used globally.
The foreign exchange market is considered to be the most liquid and transparent market in the world with large of players getting benefited and most importantly without any small group, getting the advantages and profit shares. The spot foreign exchange market mostly runs on a transparent exchange-based platform. In this case, most of the trades take place real-time on heavily regulated exchanges, but markedly different from the submission-led, proprietary benchmark process used by Libor or Brent.
In view of the fact, that these benchmarks are present which in turn are used for financial valuations globally, the manipulation is most likely propagated without checks. But the impact for this front running could be really significant for firms that use the benchmark for social and corporate accounting.
Dominance of the financial institution
The dominance of numerous Banks and financial institution has changed the actual nature of the industry and its methodologies, which it was popularly known for. Banks such as Deutsche, Citi Bank, UBS and Barclays accounts for approximately 50% of the foreign exchange market. Here is a small inforgraphic which shows how banks are dominating the forex markets. Alike, UK leads in foreign exchange trades with 32.4% of the global share, US at 18.2%, Singapore at 5.7%, Japan and Hong Kong at 7.6% and 4.1% respectively.
The International Securities Organization (IOSCO) and Financial Stability Board (FSB) have been proactively reviewing the benchmarking process for interest rates, crude oil prices and other allied products, since 2011. However, in spite of all reviewing, the global financial governance could hardly see front running coming. There is hardly any way to review foreign exchange rates and the ensuing benchmark process. Several videos over the internet show how front running can be effectively used in the foreign exchange market.
The guidelines issued for the foreign exchange derivative products in the US, under the Dodd –Frank Act is the only legislative effort that is made recently in this domain, in order to control front running. But Dodd-Frank method exclude regulation for spot exchange transactions.
With such manipulation in the foreign exchange rates, developed economies are getting severely damaged. The merging markets are even more affected as they are ‘price takers’, instead of being ‘price makers’. Indian market is highly affected with the contingent foreign exchange rates. However, it is true that the spot trading of the rupee happens only in India, it is unlikely that the manipulations affect us in this instance. The only possible link could be with the Non-Deliverable Forwards (NDF) markets, which are based in London, Dubai and Singapore, where rates are used by the benchmarking companies.
The offshore market has grown much larger than the currency trading market in the nation, which is certainly an important point of concern after the dramatic fall of rupee to such an extent. If this involvement can manipulate an exchange based trade, it can certainly happen for an over-the-counter speculative trade to benefit special interests. Along with other financial benchmarks, the Monetary Authority of Singapore has reviewed the conduct of traders in the Non-Deliverable Forwards market, since the year 2012. However, the authority is also working currently on the successful implementation of a guiding framework for regulating the overall market.
Front running is dome domestically and quite below the radar. As all trades are conducted on the exchange, currency derivatives are open to scrutiny by the regulators, but the spot market are majorly happening over-the-counter (OTC) and that is quite difficult to monitor.
In order to prevent such front running form happening, India has to be more proactive, making these transactions transparent. The effective use of software, alike Security and Exchange Board of India (SEBI) uses for stock markets, can easily spot suspicious trades. It is quite an effective solution to prevent market from such manipulations, if not the sufficient way.