Forex market manipulation refers to the illegal or unethical practices undertaken by individuals or entities to influence the foreign exchange (Forex) market, where such practices benefit them at the expense of other market participants.

This manipulation can take various forms and can be executed by different market participants which include traders, financial institutions, or even governments sometimes.

Here are some of the ways the forex market is known to experience manipulation;

Price Fixing

Collusion of traders with others to artificially fix exchange rates at specific levels. Traders or financial institutions may communicate with each other to coordinate their trades in a way that moves exchange rates to their advantage.

An instance of this is when a group traders agreeing to buy a particular currency simultaneously to push its value up.

Front Running

This happens when traders place orders on behalf of their clients and before executing the client’s orders, places their own order to take advantage of the expected price movement resulting from the client’s trade.

In this method, the traders profit at the expense of their clients.

Spoofing

This is known to be a common type of manipulation where larger players in the forex market place fake orders with the intent to mislead retail traders. Larger traders engage in spoofing by creating a huge number of orders they do not intend to execute to create a false impression of supply and demand.

When retail traders reach to these fake orders, the spoofer cancels their orders and takes advantage of the price movement.

Painting the Tape

Another institutional manipulation method where larger traders artificially inflate trading volume and manipulate the perception of market activity. In this type of manipulation, larger players trade among themselves at predetermined prices and volumes in order to create false impression of market strength and weakness.

Time Zone Arbitrage

Unlike the stock market, forex market operates 24 hours a day, five days a week across different time zones. Traders that have a faster access to information, may take advantage of the delays in information flow between the markets to manipulate exchange rates (usually done by institutional-level players).

This is done by executing large orders in one market, which influence prices in the following market that has yet to react to the market information.

Insider Trading

One of the most adversely impactful types of manipulation where individuals with access to non-public but crucial information, such as central bank officials or government employees may make use of such information to make profitable trades in the forex market.

Central Bank Interventions

This type is not deemed illegal, but central banks can manipulate the forex market through official interventions.

Central banks may buy or sell their own currency in large quantities to influence the currency’s value, and such practices are often conducted to stabilize the currency or to achieve specific policy objectives of the government to which the central bank belongs to.

Pump and Dump

One of the most common types of manipulation. In this scheme, larger traders spread false information or rumors about a particular currency or forex instrument to artificially inflate its value.

Once the value rises; which is the ‘pump’ (owing to increased demand), they sell their holdings at a profit causing the currency’s value to plummet steeply; also known as the ‘dump’.

Scandals of Market Manipulation

There are several historically important forex market manipulation scandals, that have come to light across the globe. Here are some of the major such scandals;

Libor Scandal (2012)

While this one is not exclusively a forex scandal, the London Interbank Offered Rate (Libor) scandal involved heavy manipulation of interest rates, including those related to foreign exchange.

Several major banks were found to have manipulated the Libor rates which impacted forex markets.

Forex Fixing Scandal (2013)

A year after the Libor Scandal, there were allegations made over manipulation in the forex market’s daily fixing rates. Traders from various financial institutions were accused of colluding with others to manipulate exchange rates and profit from client orders.

Major banks such as the UBS, Barclays, and Citigroup faced regulatory fines and penalties.

Deutsche Bank’s FX Rigging Scandal (2015)

Deutsche Bank faced allegations of manipulating forex markets through collusion among its traders. The bank was fined heavily by the US and UK regulatory authorities.

Currency Cartel Scandal (2015)

The “Currency Cartel” was a group of traders from major banks who were found to have engaged in collusion to manipulate forex benchmarks. Banks including JPMorgan Chase, Citigroup, and Barclays faced fines over this scandal.

HSBC’s Front-Running Scandal (2017)

One of the largest banks in the world was accused of front-running client orders to profit from confidential information. Traders at the bank were alleged to have exploited their access to client orders for their personal gain.

Wells Fargo’s Forex Scandal (2018)

Wells Fargo faced allegations of unfair and fraudulent practices. The bank was accused of overcharging customers on forex transactions and providing misleading information.

While generally considered safer, forex market faces manipulation by larger institutions that undermines the integrity of the financial system, which leads to erosion of trust in the market. More importantly, such manipulation lead to significant financial losses for unsuspecting retail traders and investors.

To ensure such manipulation is not common, regulators and law enforcement agencies across the world actively monitor the forex market to detect and prosecute instances of manipulation.