The Nub
The co-founder and chief investment officer of a UK-based hedge fund named Glen Point Capital was charged by US prosecutors earlier this week for engaging ‘in a scheme to intentionally and artificially manipulate’ currency markets, mainly the US dollar-South African rand currency pair. Neil Phillips, the co-founder and chief investment officer of a UK-based hedge fund, was charged by US prosecutors for conspiring to rig trades involving the US dollar-South African rand currency pair to ultimately trigger a payout to his firm worth $20-million.
Why Does it Matter
Through his UK-based hedge fund firm, Phillips bought what is known as “options” for the dollar-rand exchange rate in late October 2017. Options are investment products, which involve investors betting on currency exchange levels. Investors usually select a level at which the currency would trade at a particular date — known as a target price. And through normal and unmanipulated currency movements, traders or investors can make money if the dollar-rand exchange rate hits the target price at a particular date. In Phillips’s case, he purchased options worth $20-million in late October 2017, which were set to expire on 2 January 2018. Before this expiration date, the dollar-rand exchange rate, through normal market forces, had to go below R12,50 (the target price set by Phillips) for him to get back the initial investment worth $20-million and book profits.
What Next
It’s hard for a few currency traders to cause big shifts in the exchange rate movements against the US dollar. Currency trading (beyond trades in the dollar-rand exchange rate) is a large market — with more than $6-trillion traded daily, making it almost impossible to cause big shifts in an exchange rate, even with a coordinated strategy to rig currency markets by traders. The rand-dollar currency pair, specifically, trades about $ 50-billion every day, and the actions of one currency trader are unlikely to lead to large or long-term shifts in the rand’s value. Rather, traders of currencies at a bank level would feel the pain of slight movements in the exchange rate — influenced by the likes of Phillips and other rogue traders. Banks help customers exchange currencies of various countries. Slight movements in the dollar-rand exchange rate would allow banks to grow the “spread”, which is the gap between the “bid” (the price banks buy any currency at) and the “offer” (the price at which they sell currencies). A bank usually sits between people or clients that usually need to convert dollars into rands and vice-versa.
