U.S. Investigates Currency Trades by Major Banks


From their
desks at some of the world’s biggest banks, traders exchanged a
series of instant messages that earned them the nickname “the

Much like companies that rigged the
price of vitamins and animal feed, the traders were competitors
that hatched alliances for their own profits, federal investigators

If those suspicions are correct, the
group of traders shared a mission to alter the price of foreign
currencies, the largest and yet least regulated market in the
financial world. And ultimately, they flooded the market with
trades that potentially raised the cost of currency for clients but
aided the banks’ own investments.

Now the instant
messages, along with similar activity among other traders, are at
the center of an international investigation into banks like Barclays,
the Royal
Bank of Scotland
and Citigroup,
according to recent public disclosures by the banks and interviews
with investigators who spoke on the condition of anonymity. The
investigators secured the cooperation of at least one trader, a
development that has not been previously

Although the investigation is at an
early stage, authorities are already signaling the likelihood of a
legal crackdown.

“The manipulation we’ve seen so far may
just be the tip of the iceberg,” the United States Attorney
General, Eric
H. Holder Jr.
, said in a rare interview discussing an
active investigation. “We’ve recognized that this is potentially an
extremely consequential investigation.”

The banks all
declined to comment. No one has been accused of wrongdoing, and any
improper actions probably would have involved only a corner of the
overall market. One former member of the group called the “cartel”
has told colleagues that the nickname reflected the traders’
success, not any improper collusion, according to a person briefed
on the group. The group was informal, the person said, and its name
came from outside traders.

But coming fast
on the heels of a similar investigation into the rigging of global
interest rates, the latest scrutiny has unnerved the world’s
biggest banks, setting off internal scrambles to contain the
damage. Nine of the largest banks in currency trading have
announced they are facing inquiries. The banks placed about a dozen
traders on leave pending the outcome of the inquiry. And several
banks are considering limiting the ability of their traders to chat

The priority that investigators are
giving the case, which focuses on trading over the last decade,
reflects the significance of the market in the world’s major
currencies itself. With trading of more than $5 trillion a day, it
dwarfs any stock or bond market.

underscoring its importance, pension funds and other investment
managers value their portfolios using a benchmark of the currency
market. An independent service publishes that benchmark, which is
at the center of the investigation.

Despite the
market’s importance to how goods and services are priced across
national borders, it is one that is vulnerable to manipulation.
Governments have imposed only scant regulation on the trading and
there is no exchange to publicly detail the price of trades.
Instead, the banks that dominate the market — Deutsche
, Citigroup, Barclays and UBS
account for about half of all trading — control the

“This is a very opaque market and it
would be good to investigate and know it better,” said Dagfinn
Rime, a senior researcher at Norway’s central

The Justice Department’s criminal and antitrust
divisions, Mr. Holder said, are “taking a leading role” in the
“truly global investigation.”

Authorities in
Britain, the European
, Switzerland and Hong Kong are also scrutinizing
the trading activity. And alongside the Justice Department in
Washington, investigators say, the Commodity
Futures Trading Commission
has opened its own

The investigations were born from the
last major financial scandal, the rigging
of interest rate benchmarks
known as the London
interbank offered rate
, or Libor. Many of the same banks
currently under investigation in the currency case, including
Barclays, have already paid large fines to settle the Libor cases.
And some banks discovered problems in the currency market after
reviewing their broader trading practices at the government’s
urging, the authorities involved in the case

The inquiry could hinge on instant messages that traders
typed into private chat rooms.

Authorities say
they suspect that traders used the chat rooms to lay out their
strategies. The traders, using information gleaned from their
clients, are suspected of agreeing to flood the market with orders
for currencies at an opportune time each

That time came just seconds before an independent
service, WM Company, set some of the benchmark rates. The most
important rate is based on trades in a period shortly before 4 p.m.
London time, so a flurry of last-second orders from banks could
alter the rate in their favor. For example, if a customer wanted to
buy some euros, a bank would seek to drive up the rate before
selling the euros to clients at an inflated

The trading group called “the cartel,” or “the bandits
club,” included employees from R.B.S. and UBS, people briefed on
the investigation say. It is unclear when the group was operational
or if it ever crossed a legal line.

The former
member of the group told colleagues that individual client names
weren’t discussed in the electronic chat rooms. Instead, the
traders occasionally discussed positions in an effort to match
buyers and sellers, according to the person briefed on the

The market for buying and selling foreign currencies —
which can range from basic corporate transactions to highly complex
derivative deals struck by hedge funds — has grown explosively over
the last decade, experiencing barely a hiccup during the financial

It has also become a major profit center for many global
banking giants, which make money by capturing their share of the
trading flow of stocks, bonds, currencies and derivatives. For
these “flow monsters,” the name of the game is volume, as intense
global competition and technological innovation continue to
compress profit margins.

For years, the
leaders in the foreign exchange market have been Deutsche Bank and
Citigroup, which control 30 percent of the market. In recent years,
the two banks have engaged in an arms race of sorts, investing
large amounts of cash to build their own web-based proprietary
trading platforms — Autobahn for Deutsche and Velocity for
Citigroup. To a degree, these portals function as in-house
exchanges, in which the bank matches buyers with

Unlike in a traditional securities
exchange, however, where the entire market knows who is buying and
selling what at a given moment and can react accordingly, what goes
on inside Autobahn, Velocity and the other exclusive platforms is
known only to the banks themselves.

“These portals
are like ‘dark pools,’ and they represent a major profit center for
banks like Deutsche, Citigroup and Barclays,” said Michael R. King,
an expert on currency trading. “But there is little transparency
and that should concern regulators.”

While the
portals are not a focus of the investigation by authorities, they
underscore how such a large, global and liquid market can still be
so opaque.

It is only through a yearly survey
conducted by the trade publication Euromoney that major
institutions’ shares in the foreign exchange market are disclosed.
Deutsche Bank topped last year’s, with a 15.1 percent share of the
market, followed by Citigroup at 14.9

Citigroup’s fight for market share has
included offering cheaper pricing on foreign exchange deals and
wooing clients by linking
increased volume to charitable donations
. Yet amid the
gamesmanship, there have been concerns that the market could be
prone to manipulation.

Whether banks that control the market
through their web portals have an inside edge was examined earlier
this year in a paper titled “Information Flows in
Dark Markets: Dissecting Customer Currency Trades.”
by both regulators and bankers, the paper concluded that “order
flows are highly informative about future exchange rates and
provide significant economic value for the few large dealers who
have access to these flows.”

Richard K.
Lyons, the dean of the business school at the University
of California, Berkeley
, offered an explanation. Pretend,
he said, that the currency market is 1,000 people playing poker and
that eight of them have seen 10 percent of what is going on in the
market while the rest have seen less than 1

“Do the big banks make money from this
advantage? Yes, they do,” he said. “Is it a ton of money?

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