Forex Scandal: The Ethics of Exchange Rate Manipulation


By: Audrey Zhang

In November, 2014, five major banking groups wrapped up joint settlement talks with U.S., British, and Swiss regulators over the forex manipulation scandal. The banks—UBS, JPMorgan, Citigroup, RBS, and HSBC, were charged with manipulating foreign exchange rates.[1] The foreign exchange market (Forex) is a global market that sees nearly $5 trillion changing hands each day, so it is not trivial when investigators uncovered the financial giants who dominate this market were rigging the market for self-serving profits.[2] After investigation, these banks were fined a total of $3.4 billion that year, followed by another $6 billion in May 2015. Despite the large sums, these fines seem to be a trifle for offending banks.[3] In fact, the share prices of several of the banks actually rose on the news, suggesting the penalties hardly dent the profits of these banks.[4] This study explains in-depth how these banks manipulated currency exchange rates over the past decade, as well as the economic and moral implications for the rest of the global economy.

The Forex Market

The Forex market is a twenty-four hour market in which traders buy, sell, exchange, and speculate on different currencies.[5] This extremely active market sees $5.3 trillion turnover on any average day, and its relative volatility makes it difficult to comprehend how banks manipulated it for their own benefit.

While currency rates fluctuate, it is necessary to have a fixed benchmark rate so the value of investment portfolios held by larger institutions (such as pension funds and money managers) can be valued.[6] This benchmark rate is based on the trades taking place in a given time window, and the most commonly used fix is the WM/Reuters fix at 4:00 p.m. GMT.[7] The rate is calculated by taking the average levels of all trade for a period of one minute, starting 30 seconds before and ending 30 seconds after 4 p.m.[8] In other words, if a customer wants to buy a lot of euros in the next 60 seconds, the price of euros will go up over those 60 seconds. If the fix occurs at the end of that minute, then there is a profit opportunity: the euros the investor purchased pushed the price up over those five minutes, but he bought them at the average price over those five minutes, and he can sell them at the final price (the fix).[9] Because of this mechanism, each bank gets many orders per day from customers to transact at the fix. Some customers want to buy, others want to sell; so the bank nets the buyers with the sellers and ends up with some net position (to buy or to sell).[10] The goal, of course, is to buy the currency from the market at a lower price than they are sold to the customer.[11]

Traders know they can affect market prices by submitting a rush of orders during the window when the fix is set.[12] Since this skews the supply and demand of the market, the price will be affected. However, what makes this entire transaction uncertain is no one can accurately predict how many people are willing to sell euros (or any other kind of currency) over the next minute. Even if a customer knows he is buying, as long as he doesn’t know who is selling, he cannot be sure the price at which he sells will be higher than the average price over the previous minute.[13]

The Manipulation

This uncertainty in the market makes it difficult for one trader to move large quantities of sales to skew the market price. But if a trader can know in advance what other traders are doing, the risk in the transaction can be eliminated. At this juncture collaboration comes into play.

In November 2014, the U.K.’s Financial Conduct Authority (FCA) revealed that traders at the five big banks were colluding with each other via online chat rooms with names such as “The Cartel”, using pseudonyms such as “The 3 Musketeers” and “The Bandits’ Club”.[14] In these chat rooms, traders agree to place orders at a certain time and share confidential information about client orders prior to the fix. The traders then use this information to attempt to manipulate the fix in their favor.[15] Basically, if traders within the private chat rooms are selling euros to customers at the fix, they would want a high fix so they could sell at a high price. In this case, they would want to buy a lot of euros in the few minutes right before the fix in order to increase the price. To do that, they try to anticipate the actions of banks outside of these chat rooms, and take one of the following options:[16]

  1. Try to net off with outside banks (buy from them at the fix) so that the chat room traders have fewer euros to buy, but outside banks have fewer to sell to their customers.
  2. Try to sell to outside banks at the fix, so the chat room traders have more euros to buy in the last few seconds of the fix, but outside banks have more to sell.
  3. Transfer their orders to a single trader within the chat room, thereby increasing his influence in the market, and this trader then executes a single order during the fix period.

Of course, options 1 and 3 seem to be the complete opposite of each other, and it is counter intuitive they would have the same effect in favor of the positions of the traders within the private chat rooms. These bankers had not (yet) figured out a foolproof way to cheat the system—sometimes the manipulation worked, sometimes it didn’t.[17] When there happened to be more buyers than sellers at the fix, the cheat worked; when there were other customers and banks looking to sell euros at the fix, the supply is greater than demand, and price is pushed down instead. Regardless, by knowing in advance what other banks are doing and colluding with each other, these traders did get an unfair advantage allowing them to push the price around more than a pure market supply and demand system would allow.[18]

Economic Implications

In general, the price movements arising from the manipulations are so small the general public is unlikely to notice a big difference when buying foreign currency. Furthermore, since this cheat method isn’t foolproof, the profits of these banks seem “relatively modest and inconsistent”.[19] However, the rigging does mean sometimes holiday makers end up paying more for their vacation money as a result of the currency manipulation.[20] It could also have a distorting effect on relative prices for imports and exports related to the various currencies.[21] Additionally, manipulation of forex rates skews the value of pension funds and investments, affecting the customers of these banks and potentially costing them millions of dollars.[22] The overall economic impact of the rigging is hard to pin down to a specific number, but banking analyst Dick Bove estimates the rate-rigging activities by less than twenty traders have cost shareholders almost $6 billion.[23]

Ethical Analysis

To analyze the ethical implications of the scandal, a theoretical framework is required. Utilitarianism is an ethical theory that proposes an act is morally right if and only if that act maximizes the good for all.[24] Conversely, an act that diminishes the good for all is unethical. Classic proponents of this moral theory include Jeremy Bentham, Henry Sidgwick, and John Stuart Mill.[25]

This theory reduces all morally relevant factors to consequences alone and may appear very simple at first. It is important to note the theory involves many distinct claims regarding the moral rightness of any action. Utilitarianism argues the morality of any action only depends on the consequences, rather than the intentions, of the action.[26] These consequences must be a direct result of the action, as opposed to intended or likely consequences.[27] This implies motive does not matter in the morality of the action. Furthermore, the value of these consequences are evaluated based on the pleasures and pains they cause, and the moral rightness depends on the total net good in the consequences to all people.[28]

These are only several of the distinct claims accepted by utilitarian theorists, but they provide a basic understanding of the theory, which will be applied to the case of JPMorgan in the Forex Scandal to evaluate the ethics of the acts in this case.

Case Study: JPMorgan

JPMorgan is among the four banks that pleaded guilty to the charges of rigging the fix rates of the foreign exchange market to reap a profit.[29] As mentioned previously, it is difficult to evaluate the overall financial gains to the bank as a direct result of manipulation. Instead, the FCA gives detailed examples of how traders at JPMorgan attempted to manipulate the exchange rates for their own financial profit. The following case, interpreted from the chat room histories revealed by investigators, demonstrates an attempt by a senior trader to manipulate the 4:00 p.m. WMR EUR/USD fix.[30]

JPMorgan had net buy orders of €105m and wanted to move the fix rate up.

In a chatroom conversation, it offers to transfer this order to Firm A. Firm A says “maybe”. Firm A is buying €150m at the fix “for a top [account]”, adding “i’d prefer we join forces”. JPMorgan replies “perfick . . . lets do this . . . lets double team em”. Firm A replies “YESsssssss”. Later Firm A says to JPMorgan; “I got the bookies covered”, referring to dealers in the interdealer broker market.

By the fix, JPMorgan had built orders of €278m while Firm A’s orders were €240m.

JPMorgan bought €57m in the two minutes before the fix window. The FCA said these trades were designed to take advantage of the expected upwards movement in the fix rate following the discussions within the chatroom.

During the fix window, JPMorgan bought €134m and Firm A bought €125m. Between them they accounted for 41 per cent of the euro-dollar trade.[31]

Utilitarian Analysis

First, analyze the consequences of these traders’ actions on themselves. In this specific example, JPMorgan’s profit in the trade was $33,000, a significant amount of money to be made within a sixty-second window. For these financial giants, however, this is a rather small sum to be added to the overall earnings of a behemoth bank. More importantly, these profits made by traders over the years of manipulation do not go directly to their salaries. The main motivation for these traders to manipulate the rates was actually to boost end-of-year bonuses awarded for being a part of a team that consistently made higher profits.[32] Additionally, since the rigging does not always work in the favor of the banks, the economic gains for these traders really do not amount to a whole lot.[33]

In comparison, the fines faced by these banks are a much bigger financial loss. JPMorgan and Citibank were fined the heaviest, proportional to the extent of their involvement in the manipulations.[34] JPMorgan faced fines of $550 million to settle the charges.[35] In general, analysts agree the negative impact on the reputations of these banks, along with the financial retributions, outweigh the positive gains they made throughout the years of manipulation.[36] After the scandal was exposed, shares of both JPMorgan and Citigroup slid 0.8 percent at 12:05 in New York.[37] Despite statements from both banks saying they do not anticipate a material impact on operations or their ability to serve clients, the bad publicity clearly had some effect on these banks.[38] Even bonuses these traders vied for so much were withheld after the scandal was revealed.[39] For the banks and traders themselves, then, the net “pain” produced by the action is much greater than the net “pleasure” of financial gains, and decreased the overall utility (happiness) of the traders.

The consequences of the forex rate manipulation on other people are slightly more complex. Firstly, these banks were able to drive the exchange rate for two currencies down or up to make a profit, but the price movements from the manipulation are so small holidaymakers are unlikely to notice a big difference when buying foreign currency.[40] The bank’s actual clients suffered worse consequences, as they were paid rates worse than the true rates determined by an unrigged supply-and-demand market, and were negatively affected proportionally to the size of their investments.[41] Furthermore, these manipulations influenced virtually every economy in the world, affecting innumerable consumers, businesses, and investors all over the globe, costing an estimated $6 billion dollars combined.[42] Although it is difficult to pin down the exact amount of financial cost to others, it is safe to say there were no positive consequences for other people as a direct result of the rate manipulations, and many negative ones.

An additional negative consequence is the loss of trust in the financial system by the general public. Sadly, these riggings occurred after banks had pledged to clean up their actions after the Libor rigging scandal, when banks were found to have falsely inflated or deflated their rates to profit from trades just two years prior, in 2012.[43]

All in all, were the actions of these senior level traders colluding with each other to manipulate the fix rates of the Forex market ethical? According to utilitarianism, their actions caused a lot more negative consequences both for the bankers directly involved, and for everyone else in the global economy, and is therefore unethical. But what if the manipulations haven’t been exposed, and banks weren’t affected by bad publicity and big fines? In this situation, although the amount of profits made by the bankers would be comparatively equal to the financial loss of the greater population. Utilitarianism theory asserts that moral righteousness depends on the consequences for all people and sentient beings. The fact that a great number of people suffered negative financial consequences for the benefits of the few means the net good for all people has been reduced, and the action is not ethical.

What now?

After the investigations, JPMorgan declared in a statement, that the conduct is “principally attributable” to a single trader, who has since then been dismissed. Bloomberg reported Chairman and CEO Jamie Dimon said “The conduct described in the government’s pleadings is a great disappointment to us… We demand and expect better of our people. The lesson here is that the conduct of a small group of employees, or of even a single employee, can reflect badly on all of us.”[44] As the largest U.S. bank, and the first bank to settle the charges, JPMorgan took a responsible step to address its involvement.[45] Michael Hausfeld, a lawyer for the investors, said in a phone interview with CNBC that “It is a beginning with respect to the accountability of other banks engaged in the same trading.”[46] Does this mean these banks have learned their lesson?

First, despite facing record fines, the banks did not suffer any notable financial setback after the scandal was revealed. According to Forbes, Citigroup and JPMorgan shares were little changed, while shares for UBS and Barclays actually surged.[47] Neither the fines nor the negative impact on their reputation caused these banks a significant setback in their status as global financial giants. The real question, then, is whether the punishment meted out can cause a shift in the culture of the financial sector towards one that promotes trust, integrity, and ethical behavior. In order to avoid this type of manipulation in the future, we have to reduce the opportunities and incentives to cheat.

To reduce the opportunity to cheat, global regulators agreed to widen the daily FX fix windows from 60 seconds to five minutes, making it much harder for a few traders to influence the final fixing.[48] To reduce the incentives to cheat, some argue we must start with criminal charges being brought against some of the individuals involved.[49] Another possible step is to force the CEOs or other senior figures at these banks to resign. Ultimately, it is their responsibility to maintain a certain culture of integrity within the organization, and if they fail to do so, they should take final responsibility.[50] Without these concrete actions to dis-incentivize further similar incidents, the fines “will do little to change the pervasive culture of corruption that currently exists in the banking sector.”[51] Real changes can only occur when perpetrators face serious, personal liability for their actions, and when “corrupt bankers indicted, convicted, and sent to prison for their crimes”.[52]




[1] Taylor, “Forex Scandal.”

[2] “Trefis: Five Banks Settle Forex Manipulation Charges For 3.4 Billion”

[3] Freifeld, Henry, and Slater, “Global Banks Admit Guilt in Forex Probe, Fined Nearly $6 Billion.”

[4] Taylor, “Forex Scandal.”

[5] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[6] “What Is the Forex ‘Fix’?”

[7] Strauss, “Q&A.”

[8] “What Is the Forex ‘Fix’?.”

[9] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[10] Ibid.

[11] Ibid.

[12] Chrispin, “Forex Scandal.”

[13] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[14] Chrispin, “Forex Scandal.”

[15] Ibid.

[16] Ibid.

Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[17] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[18] Ibid.

[19] Ibid.

[20] Lumsden, “How the Foreign Exchange Trading Scandal Affects You.”

[21] Onyanga-Omara and McCoy, “Banks Fined $4.3B in Foreign Exchange Probe.”

[22] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[23]English, “JPMorgan (JPM), Citigroup (C) Among Banks Fined $2.5 Billion in Currency-Market Manipulation.”

[24] Sinnott-Armstrong, “Consequentialism.”

[25] Ibid.

[26] Ibid.

[27] Ibid.

[28] Ibid.

[29] UBS pleaded guilty to another charge, but were granted immunity for the charge of forex rate manipulation due to their early efforts to collaborate with investigators at the onset of investigations.

[30] JPMorgan Briefing.

[31] Barrett and Aglionby, “Traders’ Forex Chatroom Banter Exposed.”

For full briefing on JPMorgan by the Financial Conduct Authority:

[32] “Banks Fined £2bn over Forex Scandal.”

[33] Levine, “Banks Manipulated Foreign Exchange in Ways You Can’t Teach.”

[34] “Banks Fined £2bn over Forex Scandal.”

[35] Finch, “Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging.”

[36] Chrispin, “Forex Scandal.”

[37] Finch, “Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging.”

[38] Ibid.

[39] Fleming and Schafer, “Forex Banks Prepare to Claw Back Bonuses.”

[40] Ibid.

[41] Hutchison, “Q&A.”

[42] English, “JPMorgan (JPM), Citigroup (C) Among Banks Fined $2.5 Billion in Currency-Market Manipulation.”

[43] “Libor Scandal.”

Treanor, “City Shamed Again but Fines Fail to Stop Banks Behaving Badly.”

[44] Finch, “Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging.”

[45] Taylor, “Forex Scandal.”

[46] Ibid.

[47] Gara, “Four Banks Plead Guilty To Foreign Exchange Collusion, UBS Pleads Guilty To Wire Fraud.”

[48] Graham, “Regulators Back Widening of FX Fixing Window to 5 Mins -Sources.”

[49] Taylor, “Forex Scandal.”

[50] Ibid.

[51] Onyanga-Omara, “5 Banks Guilty of Rate-Rigging, Pay More than $5B.”

[52] Ibid.



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———. “Six Banks Pay $5.8 Billion, Five Guilty of Market Rigging.” Accessed July 8, 2015.

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