Say it Ain’t So: BoE Encouraged Currency Manipulation

by on February 7, 2014 4:38 pm BST

Last summer, Bloomberg news broke information stating that traders from the world’s largest financial institutions were taking part in manipulation of the foreign-exchange markets. Currency traders were sharing client orders and information to other traders, in some cases independent traders, through instant message features on trading terminals, such as Bloomberg’s own trading terminal.

Evidence indicates that traders would push their own orders ahead of client orders, known as “front-running,” and other tactics to profit from the 30 second window where the WM/Reuters currency rates were updated. Institutions profited, and some traders personally profited. This is what institutions called “reducing market risk.”

Now, a senior trader has given up notes from a private meeting in April 2012, which including currency dealers and two Bank of England (BoE) officials. The two officials in question are Martin Mallet, BoE’s chief currency dealer, and  James O’Conner, BoE’s foreign-exchange division staff. The traders were requested by the officials not to record what transpired at the meeting. According to the evidence, the BoE officials told the dealers it was not improper to share impending client orders and information with counterparts at other firms. The central bank further told the traders that there were no policies on these practices and that institutions would have to implement their own policies.

According to Simon Hart, a lawyer at RPC LLP in London,”they made Bank of England officials aware of practices in the FX market some time ago, then the bank will be at risk of being characterized as having endorsed, by its silence and inaction, the very practices which are now under investigation.”

This is more disconcerting that this is not the first market manipulation scandal for the BoE. The BoE and the Federal Reserve conversed on market manipulation in the LIBOR (London interbank offered rate) markets years prior to the initial probes. The two central banks said nothing was done because it was out of jurisdiction, but nothing was said to those with the power to take action either.

The BoE declined to comment about the meeting, but officials said such practices were viewed as positive in order to reduce market volatility.