The foreign exchange market, also known as forex or FX, is the largest financial market in the world. Over $6.6 trillion is traded daily on the forex market, which is more than all global equity markets combined. However, the reputation of the forex market was tarnished in the 2010s after it was revealed that some of the world’s largest banks had been manipulating currency rates to benefit their own trading positions. This forex scandal resulted in over $10 billion in fines for banks and led to increased regulation of the forex market.

Introduction to the Forex Market

The forex market allows participants to trade and speculate on the relative value of different currencies. For example, a forex trader might buy Euros in exchange for U.S. Dollars if they think the Euro will increase in value compared to the Dollar. The most frequently traded currencies on the forex market include the U.S. Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, and Australian Dollar.

Banks, hedge funds, governments, corporations, and individual retail traders all participate in the massive forex market. Traders can profit from exchange rate movements by buying and selling currency pairs. The forex market is decentralized with trading taking place all over the world electronically. It operates 24 hours a day, five days a week.

How Forex Prices are Determined

Foreign exchange rates fluctuate based on supply and demand. If more people want to buy a certain currency than sell it, the value will rise. Similarly, if more market participants want to sell a currency than buy it, the value will fall. News and economic reports can influence supply and demand of currencies. For instance, strong economic growth in the Eurozone might increase demand for Euros.

Major banks are the largest participants in the forex market. They act as market makers by constantly providing bid and ask prices at which they will buy and sell currencies. The difference between the bid and ask price is referred to as the spread. Banks try to profit from spreads and trading activities over time.

Origins of the Forex Scandal

In June 2013, Bloomberg News reported suspicious price jumps around the 4 p.m. London Fix in the forex market. The London Fix refers to benchmark currency rates that are set daily based on trading at precisely 4 p.m. U.K. time. These benchmark rates are used by mutual funds and other financial entities to value their foreign exchange holdings.

Bloomberg found that on the last trading day of the month currency rates would often spike just before 4 p.m. then snap back shortly after. This suggested possible manipulation to benefit certain market participants at the expense of others. Regulators began investigating and found evidence that traders at major banks were coordinating efforts to fix rates around the time of the London Fix.

Chat Rooms and Improper Communications

At the center of the forex scandal was the use of online chat rooms by groups of traders at competing banks to communicate with each other. Traders would use code names or just first names when discussing market movements. They shared confidential customer order flow information from their banks.

Using the chat rooms, traders would coordinate trading strategies around the London Fix to create sudden spikes or drops in currency rates. This benefited their trading positions to the detriment of counterparties on the other side of the transactions. Sharing confidential client info and coordinating trading in this manner violates compliance policies at banks.

The most widely used chat room was called “The Cartel” and had over 60 participants. Chats took place over services like Instant Bloomberg Chat, Thomson Reuters Chat, and Skype. In addition to chat rooms, traders would make verbal agreements over the phone or in person to coordinate forex trading.

Impacts of Currency Benchmark Rigging

When traders manipulated currency rates around the time of the London Fix, it had negative impacts on counterparties. For example, if a hedge fund needed to execute a large order around 4 p.m. to track the benchmark, heavy trading by banks could push the rate higher before the hedge fund bought. That forced the buyer to pay more than they should have compared to the true market rate.

Pension funds and mutual funds that used the fix rates as valuation benchmarks were also affected. When rates were artificially moved, it caused funds to lose money on currency trades or have inaccurate valuations of their portfolios.

Overall, experts estimate that manipulation around the time of the London Fix impacted trillions of dollars worth of currency trades. The Financial Conduct Authority estimated that rigging affected 41% of fixes during their investigation period.

Regulatory Investigations and Fines

Once allegations surfaced about forex manipulation, regulators in the U.S., U.K., EU, and Switzerland began investigations. They uncovered extensive evidence through reviewing chat logs, phone recordings, emails, and trading records that traders colluded to influence prices. Below are details on major fines and settlements paid by banks for currency rate rigging:

Citigroup – Paid $925 million in fines in May 2015 after pleading guilty to collusion by its forex traders.

JPMorgan Chase – Paid over $1 billion in fines in November 2014 to U.S. and U.K. regulators.

Bank of America – Paid $205 million fine in May 2015 for failure to supervise forex traders.

UBS – Fined $545 million in November 2014 by U.S. and Swiss regulators for rate manipulation.

Barclays – Paid over $2.3 billion in fines in May 2015 to the U.S. and U.K. governments.

Royal Bank of Scotland – Fined $634 million by U.S. regulators in May 2015 for trader misconduct.

HSBC – Paid fines of over $618 million in 2014 to U.K. and U.S. regulators.

In total, about $10 billion in fines were levied against over a dozen banks related to the forex scandal. Traders were banned from the industry and several were sentenced to prison for their roles.

Changes Made After the Scandal

The forex scandal highlighted inadequate oversight and control at large banks. Loosely regulated forex trading desks allowed improper behavior to fester. In response, many structural and procedural changes were made to forex trading departments at major banks.

Banks now monitor all electronic communications used by traders, including requiring records of work phones, chat programs, and emails. Cooperation between traders across different banks is strictly prohibited. Forex desks have been restructured to prevent collusion.

The Bank of England took over administration of the London Fix benchmarks in 2015. Rates are now set based on transactions during a 5 minute window, making manipulation harder. The fixes are also randomly delayed each day to reduce predictability. Regulators enacted additional reporting requirements and now closely track forex trading.

Ongoing Forex Trading Risks

While oversight of the forex market has increased post-scandal, some risks remain. The massive size of the forex market and 24 hour trading makes it hard to fully prevent manipulation, especially during off-peak hours. Chat rooms moved to platforms like WhatsApp that are harder to monitor.

Some analysts think reference rates should be phased out to reduce concentration risk. Concerns have also been raised about excessive speculative forex trading vs trades tied to real cross-border transactions. For now, investors need thorough due diligence on any forex transactions.

Impact on Retail Forex Traders

The rate rigging focused mainly on large institutional transactions around the London Fix periods. However, the scandal highlighted risks for individuals trading forex as well. Retail traders should use regulated brokers that follow ethical practices. Reputable brokers have transparent pricing and do not manipuate spreads or leverage to improve their profits.

Unfortunately, the forex scandal showed market participants will take advantage of undefined or loose regulations. Retail traders should be cautious dealing with unlicensed offshore brokers that claim to offer tax savings or other incentives. Well capitalized, regulated brokers reduce risks for individuals trading forex.


The revelation of widespread manipulation of forex benchmarks illustrates the importance of proper oversight in financial markets. When banks are allowed to operate with inadequate controls, it encourages gaming of the system and misconduct. The costs of the forex scandal in terms of fines and loss of reputation were immense.

Going forward, regulators worldwide need to cooperate to enact prudent reforms that protect market integrity without impairing liquidity. With improved transparency and monitoring, the forex market can regain public trust. However, without sustained vigilance, there is always potential for bad actors to find new ways to profit at the expense of ordinary participants. The benefits of free and fair markets depend on aggressive prevention of collusion and abuse.