I’ve been asked many times over the years:
What is Forex market manipulation?
How does it work?
Why are they doing it?
What can we do about it?
I’m going to explain exactly what market manipulation is and exactly how you can protect yourself from it.
Let’s dive in.
What Is Forex Market Manipulation
Forex market manipulation is the act of artificially altering the price of a currency in the foreign exchange market. This can be done through a variety of tactics, such as placing fake orders in the market, trading ahead of client orders, or using insider information to gain an unfair advantage.
Forex market manipulation can take many forms, but it typically involves traders or brokers using their knowledge or influence to move the market in a way that benefits them.
For example, a trader might place a large order in the market in order to create the illusion of demand for a particular currency.
This can cause other traders to believe that the currency is in high demand, which can drive up its price.
The goal of forex market manipulation is to profit from the artificial movement of prices.
For example, a trader who engages in market manipulation might buy a currency at a lower price and then sell it at a higher price, thereby making a profit.
Consequences of Forex Market Manipulation
Forex market manipulation can have serious consequences for traders and the market as a whole.
For traders, the biggest consequence of market manipulation is the risk of losing money.
When prices are artificially inflated or deflated, traders who are not aware of the manipulation may make decisions based on inaccurate information, which can result in losses.
In addition to the risk of losing money, forex market manipulation can also erode trust in the market.
When traders see that the market is being manipulated, they may lose confidence in the fairness and integrity of the market.
This can lead to reduced participation in the market, which can impact liquidity and make it harder for traders to execute trades.
Finally, forex market manipulation can also have legal and regulatory consequences.
In many countries, market manipulation is illegal and can result in fines, sanctions, and even criminal charges for traders and brokers who engage in it.
Examples of Forex Market Manipulation
The London Fix, 2014 with the Gold prices:
The London fix is a daily benchmark used to set the price of the gold price.
It is determined by a group of banks that participate in a daily auction at 10:30 AM and 3:00 PM London time.
In the past, the London fix has been subject to manipulation. In 2014, several banks were fined by regulators for manipulating the London Gold fix in order to profit from their own trades.
The banks were found to have colluded to manipulate the price of the fix by submitting false prices during the daily auction.
For example, a bank might submit a lower price for a currency than the true market price in order to buy it at a lower price and then sell it at a higher price.
This type of manipulation can allow traders to profit from the difference between the false price and the true market price.
The “Last Look” Manipulation:
The “Last Look” practice is a method used by some forex brokers and illiquidity providers to manipulate the market.
There was a legitimate need for this protocol, but it was easily manipulated because the market maker only provided quotes and not a firm price.
What this means is that in the time it takes to execute, the broker could have change the price away from the quote. Thus making you lose out.
In this practice, brokers can reject or requote trades if they are not in the broker’s favor.
For example, suppose a trader places an order to buy a currency at a certain price.
If the price of the currency moves in the trader’s favor before the trade is executed, the broker may reject the trade and keep the difference between the original price and the new, higher price.
This allows the broker to profit from the trader’s successful trade without actually executing it.
How to Protect Against Forex Market Manipulation
If you’re a forex trader, it’s important to protect yourself against market manipulation. Here are some steps you can take to do that:
- Choose a reputable and regulated forex broker. This is really important because regulated brokers are required to follow strict rules and guidelines. This can help to prevent market manipulation. In addition, reputable brokers are more likely to have strong internal controls and compliance systems in place to detect and prevent market manipulation.
- Be aware of market manipulation tactics. By understanding the common tactics used to manipulate the market, such as spoofing and the “Last Look” practice, you can be more cautious and vigilant when making trades.
- Carefully monitor your trades. By carefully monitoring your trades, you can spot any potential signs of market manipulation, such as sudden and unexpected price movements, and take appropriate action to protect yourself.
Conclusion
The forex market is a highly complex and dynamic market that is subject to various forms of manipulation.
This can take many forms, including the use of insider information, false news, and other tactics to sway market prices in favor of the manipulator.
While there are various regulations in place to prevent and detect market manipulation, it remains a pervasive issue that continues to affect the forex market.
It is important for traders to be aware of the risks and to take steps to protect themselves from manipulation.
This may include staying informed about the latest regulatory developments and being cautious when making trading decisions.
