Unlike the stock market’s closing bell at the end of the day, the trade in currency operates around the clock. And since there’s no end-of-the-day benchmark, the foreign exchange market draws a line in each day’s trading at 4 p.m. London time.
Joe Marston, a small-time, retail foreign exchange trader, says whatever exchange rates happen to be within a 60-second window become what’s known as the "4 p.m. Fix."
"The 4 p.m. Fix was devised so everybody around the world knows what the price is at 4 o’clock," says Marston. "So that’s the benchmark."
It’s an important benchmark. Multinational companies and pension funds use it as a price to make enormous foreign currency deals.
And regulators suspect traders may have rigged the 4 p.m. Fix to make more profit.
Here's how it works: On a quiet trading day, Marston shows on his computer screen that the Euro hovers at about $1.35 in U.S. dollars. But just moments before the 4p.m. Fix was set, the numbers on Marston’s screen start to tick upward.
"It’s moving up a little bit," says Marston. "Sometimes the market can actually move quite violently a few minutes before."
That movement has attracted the attention of U.S. and European regulators.
"Round about exactly 4 p.m., there appear to be jumps in the exchange rate that disappear after a few minutes," says Mark Taylor, a former currency trader who's now dean at Warwick Business School. Taylor says if you look at the 4 p.m. Fix over several months, you see a very suspicious pattern.
"What it suggests is that people are deliberately trying to manipulate the market around that time."
Traders at some of the world’s largest banks are suspected of collaborating through online chat rooms with names like "The Cartel" and "The Bandits’ Club," and they’re believed to have conspired to combine billions of dollars in trades to shift the 4 p.m. Fix. It’s what’s known in trader-speak as "Banging the Close".
"It suggests that you’re banging something in order to move it," says Taylor. "And you’ve only got to move the market a small amount for a small period of time for that to translate into literally millions of dollars of profit."
Taylor says the concern is that banks make their profits by charging clients the higher 4 p.m. Fix rate, while really putting currency trades through at a lower price once the market settles down. Richard Payne at Cass Business School says, for the moment, these are just allegations. But this is possible, he says, because the global currency market is largely unregulated, and concentrated among a handful of players.
"There are only a few big banks that control the vast majority of currency trading on the planet, says Payne, "and we can all name them – Deutsche Bank, Barclays, UBS."
That list includes Citigroup and JP Morgan. No bank would comment for this story. But many have already suspended their top currency traders as investigations continue. And any proof of wrongdoing could bring steep fines.