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Thursday, February 29, 2024

Traders Rigging FX Options: Insider Insights into Fixing Schemes


Foreign exchange (FX) is the world’s largest and most liquid financial market, with over $6 trillion traded each day. As such, it’s no surprise that the market has been plagued by numerous scandals over the years. One of the most recent and significant scandals was the rigging of FX options by traders.

FX options give traders the right, but not the obligation, to exchange one currency for another at a predetermined rate on a specified date in the future. They’re a popular hedging tool used by large corporations and financial institutions to manage their currency risk. However, as with any financial instrument, they can be manipulated by dishonest traders.

The rigging of FX options involves traders colluding to manipulate prices, fees and the exercising of options to their advantage. This can result in millions of dollars in profits for the traders, at the expense of their clients and counterparties.

So how do traders rig FX options? Insider insights have shed light on some of the most common tactics used.

Front-running: This involves a trader placing a trade ahead of a client’s trade to take advantage of the price movement that will occur as a result. For example, if a client is looking to buy a large amount of options, a trader may buy options for their own account first, causing the price to rise, before selling the options to the client at a higher price.

Last look: This allows traders to delay their decision to execute a trade until they’ve had a final look at the price at which they can buy or sell it. In FX options, traders can use the technology called “last look” to see the prices offered to them by clients before deciding whether to execute the trade. This can give them an unfair advantage, as they can cancel the trade if they don’t like the price.

Colluding on options pricing: Traders from different firms can collude to set the price of an option at a level that favours them. This is often done by agreeing to a pre-determined range of prices that they’ll put forward for a particular option.

Spoofing: This involves traders placing orders for options that they have no intention of executing, to manipulate the price up or down. They do this by placing large buy or sell orders, then cancelling them once the price has moved in their favour.

Rigging the exercising of options: Traders can also collude to rig the time at which options are exercised, to their benefit. For example, if a client’s option is set to expire on a Friday, a trader may collude with another trader at a different firm to manipulate the price of the underlying currency on Thursday, before the client has a chance to exercise the option.

In conclusion, the rigging of FX options by traders is a serious issue that has cost clients and counterparties millions of dollars. Regulators have taken action against banks involved in these schemes, but it’s up to the industry as a whole to work towards a fairer and more transparent market. This can be achieved through greater regulatory oversight, improved technology, and ethical conduct from traders themselves.

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