FX Brokers Investigated by NYS AG for Spoofing

The New York State Attorney General is investigating FX brokers for spoofing on their electronic platforms. The investigation is looking into whether or not the brokers did this in FX options for emerging market (EM) currencies, to create the illusion of more trading and liquidity in order to increase customer demand for these instruments. FX options in EM currencies tend to be illiquid with a limited amount of trading.

Spoofing is the posting of orders to buy or sell with the intent of cancelling them without execution. While spoofing is frequently used as a means to lead a market in a particular direction, here it seems the concern is that brokers were trying to create the appearance of a more liquid, vibrant market in order to lure additional trades onto the brokers' FX EM options platforms. The AG is reported to have subpoenaed records from brokers including TFS-ICAP, Tullett Prebon, BGC Partners and GFI Group.

Dismissed Citi FX Trader Wins with "everyone else was doing it"

The former trader brought a lawsuit in front of a UK employment tribunal saying that he was unfairly terminated by Citi. He said that his conduct (sharing information in chat rooms with other FX traders, including sharing private info regarding client trades) was quite common at the time and that his managers were aware that he was on the chat rooms. In 2009 during an employment review he was told by his manager to join chat rooms to gather market information, but was not provided any guidelines on what he could post.

The tribunal found in his favor, although saying that he contributed to his dismissal. A hearing next year will determine the compensation that Citi is required to pay him.

This argument is not one that usually wins in a court ("officer, why did you stop me? Everyone else was speeding also). Although this verdict may help other former bank FX traders who are bringing suits, it does not impact anything else regarding the fixing scandals, such as guilt or fines and settlements with regulators.

Upcoming FX Settlements for Barclays and Deutsche

While FX misconduct investigations began regarding attempts to rig daily spot fixes, it has broadened to additional areas. Now the Financial Times reports that Barclays is near a settlement of over $100 million with the New York Department of Financial Services (NYDFS) regarding the misuse of the last look feature on its FX trading platform, BARX. Last look gives a bank the ability to quickly back out of a trade if there is a significant spot move against them. Those trading on a last look platform would expect to see tighter spreads in exchange for the proper usage of the last look provision.

The FT also reports on several FX investigations into Deutsche. These include the NYSDFS looking into Deutsche's trading platform, Autobahn, a report that there is evidence the bank intentionally set up algorithms to rig the currency markets,and that NYDFS, the Justice Department and other federal agencies have evidence that the bank profited by front running client FX orders. The new CEO at Deutsche may be more willing to try to settle these FX, and other investigations of past misconduct, quickly so that they can concentrate on the changing banking environment.