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Ethics and Exploitation in the Foreign Exchange Market

I recently attended a leading thought provoking seminar on ethics and it really got me thinking about the importance and prevalence of ethics in the foreign exchange market.  There are numerous issues that abound, some of which lead to the fairness of the prices our trades get exercised at and whether we profit; the real heart of the transactions and fair play.

Today I want to touch on a “now” ethical topic and inform you of the latest potential exploitation being investigated in the foreign exchange market.

Possible Exploitation By Large Banking Institutions

Many banks are in a position of supreme knowledge.  Large client institutions are exchanging foreign exchange for legitimate commercial purposes to transfer currency balances from one currency to another or to hedge commercial or speculative interests.  These are the big time players with serious money to transact who have a much greater ability to move prices and influence the market than us.  Banks are on the inside with knowledge of the large forex dealings.

The foreign exchange market is alleged to be massive at a volume of $5 trillion-a-day with no single exchange.  The transactions of private traders are but a tiny little squid swimming in the giant ocean.

We have these banks in a strong position with inside knowledge of forex orders from their own clients.  Not only that, but they sometimes have mates or colleagues at other banks in a similar position of knowledge power.  With a bit of chitchat, the knowledge of the trader can leak both ways and expand even larger.  Not only do they know about their own big player customer forex orders, but they now have the power of knowledge of other key insiders.

There’s a suspicion that some of these traders in the know may have used that information to place trades ahead of the real commercial transactions entrusted to them, to improve their own personal financial position or that of their employing bank.

Greed can be a big motivator.

In Banks We Trust

When a company goes to a bank to transact foreign exchange there’s a large amount of trust placed by the company on the bank, to protect the information and to do their business, without using their knowledge to the bank or another’s advantage.

A bank cannot assert that they would not have a conflict of interest.  Perhaps they have another customer who’s the competition, or they’ve received instructions from someone else that would work against the instructions received from another.  Conflict of interest aside, there’s a strong expectation that the bank would act with a high degree of independence and confidentiality in respect of the business it receives from each customer.

Standard Of The Fiduciary Duty

A fiduciary duty arises when a party places their trust and confidence to protect their money or property in another party.  When this arises a fiduciary duty means that the party accepting the responsibility for the money or property is to act in good faith to protect it.  They are to act in the best interests of the party whom is vulnerable and placing their trust in them.

There are certain types of relationships where the fiduciary duty is applicable.  Such as principal and agent, broker and client, trustee and beneficiary and so on.  It’s not acceptable to stab the party trusting you in the back.

Fiduciary duty is a standard that underpins the legal systems in many countries and is an important concept in common law.  Not only is it a legal responsibility, but also it’s an ethical one to be responsible with the trust that’s placed on you, to act in a trust-worthy manner.

All of us would expect that a bank would accept our money and instructions and act upon them trustfully, prudently and honestly.  Without an ulterior motive to take advantage of the knowledge and trust we place in them.

Enforcing A Duty Of Care

As the inquiry into the actions of various banks, including big names Goldman Sachs, Barclays, Citi Group, UBS and Deutsche Bank is underway.  We welcome the actions that demonstrate a fiduciary duty applies to our foreign exchange dealings.

Areas of risk in the foreign exchange market are:

  • The potential for banks and their employees to use knowledge of their clients’ activities to their own advantage and not necessarily in the best interests of their client.  This is the subject of the recent investigation.
  • The independence of banks who operate a speculative foreign exchange section for the bank’s gain and the ease with which they can profit from insider information about other parties commercial and speculative activities.
  • Forex brokers who operate dealing desks acting in a way that knowingly sabotages the interests of the customer to their own advantage.
  • Market makers, who contractually and by their very name, can trade against their own customers for profit, even intentionally with motive.

Now I’m in no way suggesting that these risk situations are occurring, but they are clear areas of risk.  A conflict of interest is naturally there and without a sound conscience for strong ethical behaviour and responsible actions there’s vulnerability there for the taking.

Many forex brokers will have competitive and transparent operations where they facilitate traders to transact how they want at competitive prices.  These are the businesses where traders can thrive and the forex broker benefits from a growing and satisfied customer base.

Taking Responsibility

As the guardian of our own fortunes we need to be able to rely on a market of integrity and honesty, but it’s our responsibility to not make ourselves a sitting duck where you can be taken advantage of too easily.

Remember, if the deal’s too good to be true, it usually is.

What do you think is ethical or not in the foreign exchange industry?  Do you think it’s ok for banks to use their knowledge of customer transactions for their own advantage?  What standard of care do you expect from your forex broker?  Please share your thoughts.

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About Rachel Hunter TraderRachAbout the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex.  Be strategic and design your trading business for sustainable success and have fun!  That’s my mission.  Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies.  Years of precious learning specially packaged up for you.  My background before trading is as a Chartered Accountant and Chief Financial Officer.   I know what it takes to make a trading business rock on.  It would give me great pleasure to make a difference to your success.

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Categories: Forex Market

3 Responses so far.


  1. robert nix says:

    Hi Rachel: an extremely good article on a massive market largely unsupervised i imagine ,so that ‘front-running’ will always be a temptation.

    Coincidentally,on the 21st when your article arrived i wanted to sell 200 USD out of a USD savings account into a CAD checking account.
    At the time ,USD/CAD was trading at 1.05xx.I was offered 1.02xx.Did the bank (Royal Bank of Canada) know something i didn’t know or am i just a simple retail trader?
    Of course i didn’t take the trade.

    Regards,
    Robert

  2. eddie says:

    Hi TR,

    I just read your piece and agree with you. The world of high finance has a motto, who ever has the most gold makes the rules. If you want to trade Forex you have to know the rules. I want my piece of the Forex pie and I will focus my energies to get it.

    Regards

    Eddie

  3. David A. says:

    Money goes from the big boys to the small boys. People who complain about injustice clarifies that their knowledge is shallow.

    They said ignorance is bliss. After 7 years of trading I know my patterns very well. But in just one night of curiosity. I attain wisdom.

    Ignorance is expensive, knowledge is not cheap. Wisdom is when everyone know what is going on and you r silence.

    Greed and capitalism is the reason where the market goes where it goes.

    It is those that doesn’t do good with money n focus on themselves that is the cause of destruction.

    Look at Paul Walker.

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