Question

Hi Anna – I can understand maybe how market makers can manipulate prices in equities, but I can’t quite get my head round how insiders can manipulate the price in Forex. I know you say they use News releases, but I don’t see how – unless you mean that the insiders as far as Forex goes are the ones releasing the news? And if so, do you mean they manipulate the numbers to achieve their aims? I guess I don’t understand just who the insiders are in this case.

Sorry if I’m being dense Anna, let’s put it down to my age! Any help you can give me would be greatly appreciated.

Answer

Many thanks for your email and a great question, which I will try to answer for you and one I get asked a great deal, so here goes.

The market makers in forex, are essentially a group of the major banks who create the price feeds which ultimately appear in a variety of ways to our desktops and platforms. This is the interbank market and from which the foreign exchanges quotes are created and derived in a myriad of ways. Whilst the banks do not control the news as such, what they do, is act in concert on a news release, to trap traders on the wrong side of the market. With their inside knowledge and control of the market through the exchange rates quoted, it’s a simple step to manipulate the prices either for milliseconds, seconds or minutes, taking out stops and trapping the unwary. These banks are simply market makers on a grand scale, creating the market and prices. They are no different in this respect to an FX broker market maker, who takes their price feed, and then makes a market for his or her customers.

And for further evidence here is a link to one of the many articles concerning price fixing in the forex market, in this case by the SFO in the UK and published recently in the Financial Times: http://www.ft.com/

These investigations come and go, and are really there to convince the public that the authorities have some control over the market. This of course is far from the truth as there is simply too much money to be made by the Interbank pool who will continue manipulating prices, as and when it suits them. The news is an easy way to do this, and you can see them at work in any major news release – Non Farm Payroll is a favourite. What generally happens is that the market moves violently in one direction for the first few minutes, only to reverse and move in the opposite direction shortly after. The reason given by the media is that the first few minutes was a reaction to the headline number, whilst the reversal followed a more considered view of the detailed data! I will leave you to draw your own conclusion, but in their own way, the media make their job even easier! After all, if the media were to give a full explanation this would be far too long and confusing, and in today’s sound bite world, it’s much easier for them to simply report this as the reason, and then move on to the next 30 second sound bite. The news is their favourite vehicle for price manipulation, and to be honest, given the chance, we would do the same! This activity is then further ‘enhanced’ by the activities of the market making brokers, although this aspect is improving slowly through tighter regulatory controls, but is still widespread with the less reputable brokers.

Finally of course, if you thought that was the end of price manipulation – think again, as the Central Banks are the biggest manipulators of all. Because they are tasked with managing their home economies, they only have one simple instrument with which to manipulate the home currency and exchange rates. It’s called the interest rate (or two instruments if you consider bond buying as another). The so called currency wars, or race to the bottom have seen interest rates collapse around the world as central banks, en masse, have moved to protect their own markets. This long period of exchange rate manipulation is gradually coming to an end as the deep trough of recession may finally be reaching a conclusion, with the US and UK both signalling possible increases in interest rates in 2015. The central banks would argue they are ‘managing’ their currency – semantics!

To conclude, whichever way you look, the forex market is anything but a market of free floating exchange rates. Anyone who truly believes this to be the case needs a reality check in my humble opinion.

I hope the above helps and thanks once again for a great question, All best wishes Kind regards – Anna

By Anna Coulling