How to game the $5.3 trillion currency market

How big banks broke the rules
How big banks broke the rules

Gaming the global financial system is easy when you get some help from your friends.

(Just watch out for the billions in resulting regulatory fines!)

British and U.S. regulators revealed Wednesday that chummy currency traders at a handful of major banks used private online chatrooms to coordinate their buying and selling to shift currency prices in their favor.

Here's how they did it:

1. Make friends: According to the U.K. Financial Conduct Authority, traders met in online chatrooms to exchange information with trusted colleagues from other banks. These traders called themselves "the 3 musketeers" and the "A team," among other names.

The U.S. Commodity Futures Trading Commission described how traders discussed bringing new colleagues into their inner circle.

One trader asked: "Is he gonna protect us ... like we protect each other against our own branches[?]"

2. Coordinate movements: Once traders form a clique, they tell one another when they plan to make big purchases or sales in the currency market.

In one instance, a trader at HSBC (HSBC) revealed that he needed to sell £400 million ($633 million) in the currency markets in exchange for U.S. dollars. In order to turn a profit, he wanted to artificially push down the price of the pound at 4 p.m. London time, which would hurt his clients. This timing is critical because it's when global market rates are set.

Through a series of chatroom and one-on-one conversations, the HSBC trader coordinated the moves of other traders and set the stage for a short-term decline in the pound.

3. Execute: Over the 30 minute period before 4 p.m., the value of the pound versus the U.S. dollar declined. The HSBC trader sold £311 million at 4 p.m., ensuring the price was thoroughly depressed.

His trading friends also executed trades to help push the pound down.

4. Profit: Regulators say this single shady strategy helped HSBC make a $162,000 profit.

5. Pat yourself on the back: After the selling was complete, traders that had colluded together congratulated themselves, saying things like "Nice work gents" and "Hooray, nice work team."

One particular trader exclaimed, "We need a few more of those for me to get back on track this month."

Related: The guy who tried to rig gold prices and cost his bank $44 million

But regulators caught on and slapped HSBC and five other banks with over $4 billion in fines for the illicit trading scheme.

It is possible that the banks and individual employees will also face criminal charges in both the U.K. and U.S. over attempts to manipulate the rates.

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