Oranges, lemons and forex
November 14, 2014 3:32 AM Subscribe
ON MONDAY: You are on your way to the fruit market, because you want to buy five oranges. Someone you’ve never met before accosts you on your way and says “Hey, you! Could you buy me five oranges please? I’ll give you the money when you come back and pay you ten pence for doing it”. You think what the hell, and say yes.Daniel Davies tries to explain the FX scandal using the analogy of a fruit market.
Oh, it's just going to describe how it's happening and not tell us what to think. I was hoping for something a little more didactic, but actually it's far better to have a look at the slippery slope from what it looks like while you're on it rather than glaring down from the top to the bottom. Especially given that no one's really at the top of the not cheating anyone slippery slope.
posted by ambrosen at 3:57 AM on November 14, 2014 [2 favorites]
posted by ambrosen at 3:57 AM on November 14, 2014 [2 favorites]
See, I'd have just declined to buy someone's oranges for them in the first place on the second day because fuck you man I can do you a favor once in a while but I'm not your errand girl.
posted by EmpressCallipygos at 4:34 AM on November 14, 2014 [13 favorites]
posted by EmpressCallipygos at 4:34 AM on November 14, 2014 [13 favorites]
The fixed income trading markets do need wholesale reform. But that reform has to take place on a sensible and sustainable basis, and while the clients and buyside institutions continue to see this as simply a matter of sell-side perfidy while ignoring their own role in creating the uniquely dysfunctional market infrastructure, it’s not going to go anywhere.
When they say that the market rationalizes price dispersion, they mean that it does so in analogy to the way that con artists rationalize their actions by pointing to the mark's gullibility and naïveté.
posted by kewb at 4:36 AM on November 14, 2014
When they say that the market rationalizes price dispersion, they mean that it does so in analogy to the way that con artists rationalize their actions by pointing to the mark's gullibility and naïveté.
posted by kewb at 4:36 AM on November 14, 2014
See, I'd have just declined to buy someone's oranges for them in the first place on the second day because fuck you man I can do you a favor once in a while but I'm not your errand girl.
That's the cheat in the linked article's analogy: this isn't buying oranges because "Yum! oranges" and then doing your neighbor a favor, it's buying loads of oranges on behalf of Wal-Mart and then also making a little more on the side by buying a few of them for Frankie down the street, all for fee and commission.
posted by kewb at 4:43 AM on November 14, 2014 [1 favorite]
That's the cheat in the linked article's analogy: this isn't buying oranges because "Yum! oranges" and then doing your neighbor a favor, it's buying loads of oranges on behalf of Wal-Mart and then also making a little more on the side by buying a few of them for Frankie down the street, all for fee and commission.
posted by kewb at 4:43 AM on November 14, 2014 [1 favorite]
UBS
Royal Bank of Scotland
HSBC Holdings
Bank of America
Barclays
We have seen all of these names before in past scandals with no meaningful censorship except relatively small fines compared to the theft. Is anyone keeping a scoresheet of all their misdemeaners? and also lists of who was supposed to be in charge?.
It really is about time that some of the leading bankers went to jail, even to trial would be a start; and ...shock..horror.. maybe these giant piles of dung should be broken up.
posted by adamvasco at 5:16 AM on November 14, 2014 [2 favorites]
Royal Bank of Scotland
HSBC Holdings
Bank of America
Barclays
We have seen all of these names before in past scandals with no meaningful censorship except relatively small fines compared to the theft. Is anyone keeping a scoresheet of all their misdemeaners? and also lists of who was supposed to be in charge?.
It really is about time that some of the leading bankers went to jail, even to trial would be a start; and ...shock..horror.. maybe these giant piles of dung should be broken up.
posted by adamvasco at 5:16 AM on November 14, 2014 [2 favorites]
"Say you're on the way to the bank to knock it over and a stranger says 'could you get $100 out for me while you're there? Here's my ATM card and PIN.'" ...
posted by Tell Me No Lies at 5:22 AM on November 14, 2014 [4 favorites]
posted by Tell Me No Lies at 5:22 AM on November 14, 2014 [4 favorites]
We absolutely should be angry. Apologies for an generalization, but the global financial system is rotten to its roots. It's also considered too big to fail.
The average person does not understand the international financial system. It is highly convoluted and complicated, filled full with charades. How many people know the Federal Reserve is for all intents and purposes a private company that pays shareholders a dividend on its income?
Here's a good documentary (from Queuepolitely) that might change the way you think about money: 97% Owned (YouTube)
posted by movablesingularity at 6:13 AM on November 14, 2014 [2 favorites]
The average person does not understand the international financial system. It is highly convoluted and complicated, filled full with charades. How many people know the Federal Reserve is for all intents and purposes a private company that pays shareholders a dividend on its income?
Here's a good documentary (from Queuepolitely) that might change the way you think about money: 97% Owned (YouTube)
posted by movablesingularity at 6:13 AM on November 14, 2014 [2 favorites]
We have seen all of these names before in past scandals
They are the biggest investment banks. They're going to show up when people talk about investing.
posted by smackfu at 6:20 AM on November 14, 2014 [4 favorites]
They are the biggest investment banks. They're going to show up when people talk about investing.
posted by smackfu at 6:20 AM on November 14, 2014 [4 favorites]
That's the cheat in the linked article's analogy: this isn't buying oranges because "Yum! oranges" and then doing your neighbor a favor, it's buying loads of oranges on behalf of Wal-Mart and then also making a little more on the side by buying a few of them for Frankie down the street, all for fee and commission.
Actually, no - the cheat in the analogy is that they're making it sound like the stockbrokers (who I presume you're supposed to be the stand-in for) are these put-upon guys just trying to respond to the pressures of the people who are soooooo demanding about insisting you buy them oranges in their stead when you're just trying to do your own thing, gawd!
It would be far more accurate if the "you" in the analogy were the one going to your neighbors and being all, "hey, want me to buy your oranges for you? It's totally a good deal and I'll get you the best price i SWEAR!"
posted by EmpressCallipygos at 6:22 AM on November 14, 2014 [9 favorites]
Actually, no - the cheat in the analogy is that they're making it sound like the stockbrokers (who I presume you're supposed to be the stand-in for) are these put-upon guys just trying to respond to the pressures of the people who are soooooo demanding about insisting you buy them oranges in their stead when you're just trying to do your own thing, gawd!
It would be far more accurate if the "you" in the analogy were the one going to your neighbors and being all, "hey, want me to buy your oranges for you? It's totally a good deal and I'll get you the best price i SWEAR!"
posted by EmpressCallipygos at 6:22 AM on November 14, 2014 [9 favorites]
That's the cheat in the linked article's analogy: this isn't buying oranges because "Yum! oranges" and then doing your neighbor a favor, it's buying loads of oranges on behalf of Wal-Mart and then also making a little more on the side by buying a few of them for Frankie down the street, all for fee and commission.
And it's not the friendly, neighborhood farmer's market, either. More like the only place in town that sells oranges is Sam's club, and they've only issued a few membership cards, so anyone who wants oranges has to pay a Sam's club member to buy a few for them.
posted by penguinicity at 6:44 AM on November 14, 2014 [3 favorites]
And it's not the friendly, neighborhood farmer's market, either. More like the only place in town that sells oranges is Sam's club, and they've only issued a few membership cards, so anyone who wants oranges has to pay a Sam's club member to buy a few for them.
posted by penguinicity at 6:44 AM on November 14, 2014 [3 favorites]
Was the goal of this to distract us from the actual dealings of the scandal with a weird analogy about oranges? If so, then it totally worked for me.
posted by dogwalker at 7:09 AM on November 14, 2014
posted by dogwalker at 7:09 AM on November 14, 2014
they've only issued a few membership cards
And those membership cards come with the caveat that you'll only buy from them at the price they determine you'll pay. Forex brokers are just third-party marketing arms for the banks' trading desks.
It's not all that shady once you realize that your job is to sell lottery tickets to degenerate gamblers, knowing that even if they win occasionally, their winnings are paltry in comparison to what the house makes.
posted by jsavimbi at 7:10 AM on November 14, 2014
And those membership cards come with the caveat that you'll only buy from them at the price they determine you'll pay. Forex brokers are just third-party marketing arms for the banks' trading desks.
It's not all that shady once you realize that your job is to sell lottery tickets to degenerate gamblers, knowing that even if they win occasionally, their winnings are paltry in comparison to what the house makes.
posted by jsavimbi at 7:10 AM on November 14, 2014
What a facile article. I had a hard time reading past the author's own acknowledgment of his bullshit, "there is always a presumption that a broker promises best execution to his or her clients ... but the wholesale FX market developed in a different way ". Yes, the corrupt wholesale FX market, which hasn't been run as a fair market at all.
Still as recent disgusting market manipulation goes nothing beats the LIBOR scandal. I believe in markets, I think global capital is a force for good. But the investment banks that handle a lot of the money are crooked by design.
posted by Nelson at 7:12 AM on November 14, 2014
Still as recent disgusting market manipulation goes nothing beats the LIBOR scandal. I believe in markets, I think global capital is a force for good. But the investment banks that handle a lot of the money are crooked by design.
posted by Nelson at 7:12 AM on November 14, 2014
Quick question: I did not quite see how, on Thursday, the orange buyer "paid in information." Is this easy to explain? How did the seller gain info from the sale?
posted by TreeRooster at 7:28 AM on November 14, 2014
posted by TreeRooster at 7:28 AM on November 14, 2014
As good an illustration as any, I suppose, of why the shifty fellas in suits get all the juice and we get the pits.
posted by Mary Ellen Carter at 7:38 AM on November 14, 2014 [1 favorite]
posted by Mary Ellen Carter at 7:38 AM on November 14, 2014 [1 favorite]
TreeRooster: I think the "information" is that the seller now knows the buyer is definitely going to come and buy 5 oranges at the price he sets at the end of the day, so he knows he's not going to get stuck with 5 unsold oranges, or have to sell them to someone who wants to haggle down the price. The buyer agreeing to buy them in advanced means the uncertainty (over if they will sell and how much for) is eliminated.
But I Am Not An Economist so that might be wrong.
posted by EndsOfInvention at 8:02 AM on November 14, 2014 [1 favorite]
But I Am Not An Economist so that might be wrong.
posted by EndsOfInvention at 8:02 AM on November 14, 2014 [1 favorite]
They are the biggest investment banks. They're going to show up when people talk about investing
This isn´t about investing it´s about systematic massive fraud for which no one is ever found responsible.
Kenneth Lay and Jeffrey Skilling were prosecuted and found guilty and sentenced. They were not bankers, neither was Bernie Madoff.
What makes the bankers who pull these stunts repeatedly immune from criminal charges?
posted by adamvasco at 8:16 AM on November 14, 2014
This isn´t about investing it´s about systematic massive fraud for which no one is ever found responsible.
Kenneth Lay and Jeffrey Skilling were prosecuted and found guilty and sentenced. They were not bankers, neither was Bernie Madoff.
What makes the bankers who pull these stunts repeatedly immune from criminal charges?
posted by adamvasco at 8:16 AM on November 14, 2014
Nelson: What a facile article. I had a hard time reading past the author's own acknowledgment of his bullshit...
Fair point. But I did think this was an interesting observation:
The use of a position of privileged information to make money used to be the definition of what it meant to be a trader. At some point in the future, it is going to be the definition of what it means to be a criminal. And right now, we’re in the grey area where the boundaries of what constitutes the use of privileged information are being defined.
We can dispute how far into the grey area we actually are - I think it is already obviously criminal - but this is a good insight.
posted by RedOrGreen at 8:18 AM on November 14, 2014
Fair point. But I did think this was an interesting observation:
The use of a position of privileged information to make money used to be the definition of what it meant to be a trader. At some point in the future, it is going to be the definition of what it means to be a criminal. And right now, we’re in the grey area where the boundaries of what constitutes the use of privileged information are being defined.
We can dispute how far into the grey area we actually are - I think it is already obviously criminal - but this is a good insight.
posted by RedOrGreen at 8:18 AM on November 14, 2014
TreeRooster/EndsOfInvention, there is also the implication that the broker and trader manipulate the benchmark rate by ensuring all of the trader's oranges are presold "at the benchmark rate" by 3:59 pm. The benchmark should have been something like 55 cents, but ends up being 56 cents because only the other trader with more expensive oranges has unsold inventory.
Like Ends said, this is only possible because the buyers (illiberally?) made their orders at the future benchmark rate, which was (fraudulently?) manipulated by the broker and trader based on the certainty that they would sell the oranges at the benchmark rate set (negligently?) by the reporter.
posted by ethansr at 8:26 AM on November 14, 2014 [1 favorite]
Like Ends said, this is only possible because the buyers (illiberally?) made their orders at the future benchmark rate, which was (fraudulently?) manipulated by the broker and trader based on the certainty that they would sell the oranges at the benchmark rate set (negligently?) by the reporter.
posted by ethansr at 8:26 AM on November 14, 2014 [1 favorite]
Great article. I think it illustrates well how annoyingly simplistic and moralistic the indignation is over these scandals, just based on the usual kneejerk anti-bank reactions. Banks are plenty bad, but it's usually not as simple as someone stealing. It's more about grey areas, about who gets stuck with what risks, and about big institutional clients who ought to think but are lazy and inept.
posted by shivohum at 8:29 AM on November 14, 2014 [5 favorites]
posted by shivohum at 8:29 AM on November 14, 2014 [5 favorites]
Metafilter: fuck you man. I can do you a favor once in a while but I'm not your errand girl.
posted by Naberius at 8:43 AM on November 14, 2014 [2 favorites]
posted by Naberius at 8:43 AM on November 14, 2014 [2 favorites]
Oranges, you say?
orange brokers investment firms? Oh, right LOL, look at the con man in a fancy suit.
posted by ennui.bz at 9:50 AM on November 14, 2014
This, in my view, is the real story of the various market manipulation scandals from LIBOR to FX to high-frequency trading — clients got into the habit of pushing big orders out to the sell-side without taking care of them, kept demanding tighter and tighter pricing from their brokers without asking how those businesses would remain profitableHow is LIBOR the fault of clients squeezing those poor defenseless
posted by ennui.bz at 9:50 AM on November 14, 2014
That's the cheat in the linked article's analogy: this isn't buying oranges because "Yum! oranges" and then doing your neighbor a favor, it's buying loads of oranges on behalf of Wal-Mart and then also making a little more on the side by buying a few of them for Frankie down the street, all for fee and commission.
Actually, no - the cheat in the analogy is that they're making it sound like the stockbrokers (who I presume you're supposed to be the stand-in for) are these put-upon guys just trying to respond to the pressures of the people who are soooooo demanding about insisting you buy them oranges in their stead when you're just trying to do your own thing, gawd!
It would be far more accurate if the "you" in the analogy were the one going to your neighbors and being all, "hey, want me to buy your oranges for you? It's totally a good deal and I'll get you the best price i SWEAR!"
But they're not stockbrokers. They're Forex traders. Stockbrokers sell stocks to retail clients --- mom n' pop investors. (Some of do, anyway.) forex traders deal currency for large institutional clients, the Wall Marts and Nissans etc. of the world. The entities which are exchanging millions or billions of dollars worth of goods and services in the course of their business, such that a difference of a few pennies in the exchange rate they get when switching their dollars to yen or their Euros to yuan can make a meaningful difference to their bottom lines. The idea that the buyside in these deals is some naive old retail investor who would never have bothered to even put in his order for $500 million Aussie dollars if not sweet talked by some boiler-room hustler out of the Wolf of Wall St. is completely wrong. Front running is shady and cheating a client is wrong regardless of whether the client is Grandma Moses or Saudi ARAMCo., but the clients who where potentially being skinned here were extremely sophisticated international corporations who certainly had the capability to closely monitor this stuff and pick up on any signs of funny business if they wished to. They have People, for such things.
It's a basic fact of life in the markets that everyone is trying to screw you. Generally the regulators have focused on keeping a few pools safe for guppies to play in while leaving the Sharks to fend for themselves. This forex thing, even more than the LIBOR conspiracy, is a case of shark-on-shark crime.
posted by Diablevert at 10:10 AM on November 14, 2014 [7 favorites]
Actually, no - the cheat in the analogy is that they're making it sound like the stockbrokers (who I presume you're supposed to be the stand-in for) are these put-upon guys just trying to respond to the pressures of the people who are soooooo demanding about insisting you buy them oranges in their stead when you're just trying to do your own thing, gawd!
It would be far more accurate if the "you" in the analogy were the one going to your neighbors and being all, "hey, want me to buy your oranges for you? It's totally a good deal and I'll get you the best price i SWEAR!"
But they're not stockbrokers. They're Forex traders. Stockbrokers sell stocks to retail clients --- mom n' pop investors. (Some of do, anyway.) forex traders deal currency for large institutional clients, the Wall Marts and Nissans etc. of the world. The entities which are exchanging millions or billions of dollars worth of goods and services in the course of their business, such that a difference of a few pennies in the exchange rate they get when switching their dollars to yen or their Euros to yuan can make a meaningful difference to their bottom lines. The idea that the buyside in these deals is some naive old retail investor who would never have bothered to even put in his order for $500 million Aussie dollars if not sweet talked by some boiler-room hustler out of the Wolf of Wall St. is completely wrong. Front running is shady and cheating a client is wrong regardless of whether the client is Grandma Moses or Saudi ARAMCo., but the clients who where potentially being skinned here were extremely sophisticated international corporations who certainly had the capability to closely monitor this stuff and pick up on any signs of funny business if they wished to. They have People, for such things.
It's a basic fact of life in the markets that everyone is trying to screw you. Generally the regulators have focused on keeping a few pools safe for guppies to play in while leaving the Sharks to fend for themselves. This forex thing, even more than the LIBOR conspiracy, is a case of shark-on-shark crime.
posted by Diablevert at 10:10 AM on November 14, 2014 [7 favorites]
This reminds me of a question I have never been able to answer: what is the difference between gouging and fair profit?
posted by Pembquist at 10:15 AM on November 14, 2014
posted by Pembquist at 10:15 AM on November 14, 2014
It's a basic fact of life in the markets that everyone is trying to screw you
That's why markets are regulated by equally enforced laws. And why companies that repeatedly break those laws get dismantled and taken apart, because they have proven they are corrupt to the core and incapable of following basic laws.
(I'm on a science fiction jag today.)
posted by Nelson at 10:53 AM on November 14, 2014 [1 favorite]
That's why markets are regulated by equally enforced laws. And why companies that repeatedly break those laws get dismantled and taken apart, because they have proven they are corrupt to the core and incapable of following basic laws.
(I'm on a science fiction jag today.)
posted by Nelson at 10:53 AM on November 14, 2014 [1 favorite]
But they're not stockbrokers. They're Forex traders.
Fair enough, but my larger point - that these are people who actively choose to do this, rather than being people who were sort of pressed into it unwillingly - still applies.
posted by EmpressCallipygos at 10:58 AM on November 14, 2014
Fair enough, but my larger point - that these are people who actively choose to do this, rather than being people who were sort of pressed into it unwillingly - still applies.
posted by EmpressCallipygos at 10:58 AM on November 14, 2014
That's why markets are regulated by equally enforced laws. And why companies that repeatedly break those laws get dismantled and taken apart, because they have proven they are corrupt to the core and incapable of following basic laws.
The foreign exchange markets are not particularly tightly regulated, precisely because they cannot be covered by any one country's regulatory regime. Do these banks have to adhere to the regulations of the country in which they operate? Sure. Are they fully capable of moving those operations to the country which will provide the most favourable regulatory environment for the activities they wish to engage in? Hell yes, all you have to do is change the address on the letterhead and pay the lawyers to fill out some forms.
Fair enough, but my larger point - that these are people who actively choose to do this, rather than being people who were sort of pressed into it unwillingly - still applies
Well, when you say "this" what "this" do you mean, exactly? The whole point of the Orange analogy is that there are a variety of trading methods which might result in a trader making a profit at his customer's expense, and while some of them are clearly unethical, some are grey and some are pretty much fine, and there's no formal contract or law in place that specifies which are to be used. Combine that with the fact that there's consistent downward pressure on fees, I mean, what did they think was going to happen? If I take the butler aside and tell him, "hey Jeeves, FYI, I'm cutting your salary in half, kthxbye," how surprised to I get to be when the '87 Chateau-Neuf-la-pape turns up missing from the wine cellar? There's a scorpion-and-the-frog aspect to this story which leaves my personal outrage meter spinning pretty low.
posted by Diablevert at 11:42 AM on November 14, 2014
Well, when you say "this" what "this" do you mean, exactly? The whole point of the Orange analogy is that there are a variety of trading methods which might result in a trader making a profit at his customer's expense, and while some of them are clearly unethical, some are grey and some are pretty much fine, and there's no formal contract or law in place that specifies which are to be used.
When I say "this" I mean the act of trading itself.
The orange analogy cast me, the reader, in the part of the trader. I'm assuming the reader is meant to stand in for the trader - the forex trader, as people have pointed out. And, I'm assuming, the guy who stops you and says "here, go buy oranges for me" is the trader's customer.
The thing is, the tone I got from the analogy was that the trader is sort of unwillingly forced into the whole business of trading in the first place. They're on the way to the store to buy themselves some oranges when a busybody neighbor stops them and says "here, go buy some oranges for me too!" The analogy makes it sound like the trader's customer is someone who is forcing themselves upon the trader and imperiously saying "here, do this" - the tone I got is that if it weren't for the customers, the trader would be just buying things for their own self however they want, or possibly even not buying things.
It is that tone of "the customer is forcing me to even buy this shit in the first place, so what can you do" that I am responding to. It feels like a way of shifting blame - "yeah, okay, we're doing unethical shit, but it's your fault for being so demanding, customers, and in fact if you hadn't been so demanding I wouldn't have even been a trader in the first place." And that's the bit I don't buy - the notion that the traders are being forced into the act of engaging in trade in the first place.
I agree that there are a variety of trading methods that might result that a trader would make a profit at his customer's expense. But the orange analogy is implying that pressure from the customer themselves is what causes a trader to use those methods - as some form of rebellion. THAT'S the part I don't buy.
posted by EmpressCallipygos at 11:52 AM on November 14, 2014 [2 favorites]
When I say "this" I mean the act of trading itself.
The orange analogy cast me, the reader, in the part of the trader. I'm assuming the reader is meant to stand in for the trader - the forex trader, as people have pointed out. And, I'm assuming, the guy who stops you and says "here, go buy oranges for me" is the trader's customer.
The thing is, the tone I got from the analogy was that the trader is sort of unwillingly forced into the whole business of trading in the first place. They're on the way to the store to buy themselves some oranges when a busybody neighbor stops them and says "here, go buy some oranges for me too!" The analogy makes it sound like the trader's customer is someone who is forcing themselves upon the trader and imperiously saying "here, do this" - the tone I got is that if it weren't for the customers, the trader would be just buying things for their own self however they want, or possibly even not buying things.
It is that tone of "the customer is forcing me to even buy this shit in the first place, so what can you do" that I am responding to. It feels like a way of shifting blame - "yeah, okay, we're doing unethical shit, but it's your fault for being so demanding, customers, and in fact if you hadn't been so demanding I wouldn't have even been a trader in the first place." And that's the bit I don't buy - the notion that the traders are being forced into the act of engaging in trade in the first place.
I agree that there are a variety of trading methods that might result that a trader would make a profit at his customer's expense. But the orange analogy is implying that pressure from the customer themselves is what causes a trader to use those methods - as some form of rebellion. THAT'S the part I don't buy.
posted by EmpressCallipygos at 11:52 AM on November 14, 2014 [2 favorites]
Are you sure the scenario isn't more that they ask you to buy oranges, then when you turn around to leave, they knock you in the head and take all your purse. So you go home to get more money, and go to the market to buy oranges, and they come from behind and knock you down and steal the oranges. You go home, go back to the market, and you find they've bought up all the oranges and you'll never be able to afford another orange ever again.
Sure feels like it.
Seriously, the whole system needs an overhaul. And will never get it.
posted by BlueHorse at 11:56 AM on November 14, 2014 [1 favorite]
Sure feels like it.
Seriously, the whole system needs an overhaul. And will never get it.
posted by BlueHorse at 11:56 AM on November 14, 2014 [1 favorite]
The traders aren't forced to buy and sell oranges, no. My limited understanding, however --- quite, quite limited --- is that with forex in particular a lot of the trading volume is what is called "proprietary trading" aka "prop trades" undertaken by a "prop desk," that is, trades undertaken by the bank on the bank's own behalf, for profit.
After all, when it comes to entities for whom it is worthwhile to seek out the best exchange rates in a wide variety of currencies, big companies that have factories and suppliers all around the world are definitely on the list. But the kind of company that needs that service the most is precisely a large, international investment bank. Barclays employs forex traders to trade various currencies primarily in order to benefit Barclays, basically, because Barclays needs to move money around the world all the time, and Barclays has the resources to employ lots of traders for this purpose and supply them with lots of money so that Barclay's can try and make a profit on its own trading activities. AFAIK, the big banks would still have forex prop desks even if they didn't take orders from outside clients, or in other words, you would still be headed down to the market to buy oranges to supply your own smoothie stand even if your neighbors didn't collar you and ask you to pick him up some oranges as well.
Now watch JPD turn up and tell me I'm off my chump. Which I may be, and he should do if I am. But that's my understanding.
posted by Diablevert at 12:44 PM on November 14, 2014
After all, when it comes to entities for whom it is worthwhile to seek out the best exchange rates in a wide variety of currencies, big companies that have factories and suppliers all around the world are definitely on the list. But the kind of company that needs that service the most is precisely a large, international investment bank. Barclays employs forex traders to trade various currencies primarily in order to benefit Barclays, basically, because Barclays needs to move money around the world all the time, and Barclays has the resources to employ lots of traders for this purpose and supply them with lots of money so that Barclay's can try and make a profit on its own trading activities. AFAIK, the big banks would still have forex prop desks even if they didn't take orders from outside clients, or in other words, you would still be headed down to the market to buy oranges to supply your own smoothie stand even if your neighbors didn't collar you and ask you to pick him up some oranges as well.
Now watch JPD turn up and tell me I'm off my chump. Which I may be, and he should do if I am. But that's my understanding.
posted by Diablevert at 12:44 PM on November 14, 2014
The average person does not understand the international financial system.
With all due respect, the average person doesn't understand anything in particular, and I don't particularly fancy travelling back to the year 1850, which is what a consistent policy founded on that basis would ensure.
posted by pwnguin at 4:23 PM on November 14, 2014
With all due respect, the average person doesn't understand anything in particular, and I don't particularly fancy travelling back to the year 1850, which is what a consistent policy founded on that basis would ensure.
posted by pwnguin at 4:23 PM on November 14, 2014
After all, when it comes to entities for whom it is worthwhile to seek out the best exchange rates in a wide variety of currencies, big companies that have factories and suppliers all around the world are definitely on the list. But the kind of company that needs that service the most is precisely a large, international investment bank. Barclays employs forex traders to trade various currencies primarily in order to benefit Barclays, basically, because Barclays needs to move money around the world all the time, and Barclays has the resources to employ lots of traders for this purpose and supply them with lots of money so that Barclay's can try and make a profit on its own trading activities. AFAIK, the big banks would still have forex prop desks even if they didn't take orders from outside clients, or in other words, you would still be headed down to the market to buy oranges to supply your own smoothie stand even if your neighbors didn't collar you and ask you to pick him up some oranges as well.
That was my understanding as well Diablevert. I would also point out that my reading was that he was trying to encapsulate the history and context of the forex market formation. It's not that the banks were forced to create a FOREX market, but it made very good business sense to do so. As other companies outside of investment banks grew to be dealing with multiple international currencies (like Nike for example), they needed to hedge as well as desired to make a profit and to do so started soliciting the investment banks to make the trades.
If the analogy is accurate, and IANAT and have as limited an understanding as Diablevert (if not more so), then this line seems to encapsulate the problem to where I would agree with him:
At some point during the week, you crossed a line, but it’s not at all obvious to me where that line was.
posted by herda05 at 4:57 PM on November 14, 2014
That was my understanding as well Diablevert. I would also point out that my reading was that he was trying to encapsulate the history and context of the forex market formation. It's not that the banks were forced to create a FOREX market, but it made very good business sense to do so. As other companies outside of investment banks grew to be dealing with multiple international currencies (like Nike for example), they needed to hedge as well as desired to make a profit and to do so started soliciting the investment banks to make the trades.
If the analogy is accurate, and IANAT and have as limited an understanding as Diablevert (if not more so), then this line seems to encapsulate the problem to where I would agree with him:
At some point during the week, you crossed a line, but it’s not at all obvious to me where that line was.
posted by herda05 at 4:57 PM on November 14, 2014
At some point during the week, you crossed a line, but it’s not at all obvious to me where that line was.
It was on Monday, where a single actor tried to execute two orders simultaneously, creating a conflict of interests.
posted by pwnguin at 5:17 PM on November 14, 2014 [3 favorites]
It was on Monday, where a single actor tried to execute two orders simultaneously, creating a conflict of interests.
posted by pwnguin at 5:17 PM on November 14, 2014 [3 favorites]
Banks are plenty bad, but it's usually not as simple as someone stealing.
Actually it is pretty simple.
Price fixing electricity markets. That's stealing.
Price fixing municipal bond debt. That's stealing.
Price fixing LIBOR. That's stealing.
Price fixing commodities futures. That's stealing.
Falsifying foreclosure documents. That's stealing.
Falsifying mortgage backed securities. That's stealing.
Falsifying debt collections. That's stealing.
Credit card fraud. That's stealing.
Bribing foreign government officials for favors. That's stealing.
Price fixing credit card fees. That's stealing.
Participation in ponzi schemes. That's stealing.
Illegally foreclosing on in-service military troops. That's stealing.
Auto finance fraud. That's stealing.
And that's just one bank, JP Morgan, in the last couple of years. Some $31 billion in fines and penalties for stealing and nobody did anything wrong?
The only question is why Jamie Dimon isn't in jail, if not his head on a pike.
posted by JackFlash at 7:05 PM on November 14, 2014 [5 favorites]
Actually it is pretty simple.
Price fixing electricity markets. That's stealing.
Price fixing municipal bond debt. That's stealing.
Price fixing LIBOR. That's stealing.
Price fixing commodities futures. That's stealing.
Falsifying foreclosure documents. That's stealing.
Falsifying mortgage backed securities. That's stealing.
Falsifying debt collections. That's stealing.
Credit card fraud. That's stealing.
Bribing foreign government officials for favors. That's stealing.
Price fixing credit card fees. That's stealing.
Participation in ponzi schemes. That's stealing.
Illegally foreclosing on in-service military troops. That's stealing.
Auto finance fraud. That's stealing.
And that's just one bank, JP Morgan, in the last couple of years. Some $31 billion in fines and penalties for stealing and nobody did anything wrong?
The only question is why Jamie Dimon isn't in jail, if not his head on a pike.
posted by JackFlash at 7:05 PM on November 14, 2014 [5 favorites]
It was on Monday, where a single actor tried to execute two orders simultaneously, creating a conflict of interests.
That's just it though. In this case I don't think it was at all clear that the investment banks were under the obligation or absolute duty to act in the best interests of the clients they traded for (the legal definition of conflict of interest). That's Dan Davies' actual point of the whole piece and where he feels the grey area is. At the end of the week it was clearly illegal what occurred (price fixing), but at what point they moved from a conflict of interest (in the non-legal sense of just multiple competing interests), which happens all the time, to price fixing was a spectrum.
I'm not one to defend investment banks, and I think that's what some arguments above are forcing Diablevert and myself into. Shark on Shark crime is an apt description to me, and therefore one that doesn't raise my outrage meter.
LIBOR I think is a very different matter. Although the crime might have been shark on shark, my understanding of LIBOR is that it has all sorts of cascade effects throughout the financial system which hurt the everyman in tangible ways. What I'm not sure of is, does the same hold for FOREX? It would definitely be sweet if JPD or someone else more knowledgeable than myself on the complexities and impacts of these scandals provided that sort of context.
posted by herda05 at 9:25 PM on November 14, 2014 [1 favorite]
That's just it though. In this case I don't think it was at all clear that the investment banks were under the obligation or absolute duty to act in the best interests of the clients they traded for (the legal definition of conflict of interest). That's Dan Davies' actual point of the whole piece and where he feels the grey area is. At the end of the week it was clearly illegal what occurred (price fixing), but at what point they moved from a conflict of interest (in the non-legal sense of just multiple competing interests), which happens all the time, to price fixing was a spectrum.
I'm not one to defend investment banks, and I think that's what some arguments above are forcing Diablevert and myself into. Shark on Shark crime is an apt description to me, and therefore one that doesn't raise my outrage meter.
LIBOR I think is a very different matter. Although the crime might have been shark on shark, my understanding of LIBOR is that it has all sorts of cascade effects throughout the financial system which hurt the everyman in tangible ways. What I'm not sure of is, does the same hold for FOREX? It would definitely be sweet if JPD or someone else more knowledgeable than myself on the complexities and impacts of these scandals provided that sort of context.
posted by herda05 at 9:25 PM on November 14, 2014 [1 favorite]
herda05: "my understanding of LIBOR is that it has all sorts of cascade effects throughout the financial system which hurt the everyman in tangible ways. What I'm not sure of is, does the same hold for FOREX?"
I'm a person who is moving internationally in the next couple of months. I have a single-digit number of thousands of dollars that I need to turn into pounds. The only way I can do this is by getting a financial company to do this for me. When the currency market is a venue for banks to continually try to fuck each other out of a few tenths of a percentage point, then I have to pay extra to cover this fuckage.
I don't know how much this will actually cost me -- probably very little in fact (because I don't have very much money to begin with). But investment banks lately seem capable of perverting every market (home mortgage, foreign exchange, commodity futures, ...) into a free-for-all.
What if we made a law that investment banks could only trade by betting on games of Monopoly or Settlers of Catan or something? I don't think it would work; it would be too close to zero-sum for the banks. It seems pretty clear that the banks need a steady supply of real people whose vital interests are actually on the line to anchor the markets in which they play their demented games. It's in that sense that the parasitism in this and every other case seems perfectly analogous.
posted by dendrochronologizer at 6:17 AM on November 15, 2014 [1 favorite]
I'm a person who is moving internationally in the next couple of months. I have a single-digit number of thousands of dollars that I need to turn into pounds. The only way I can do this is by getting a financial company to do this for me. When the currency market is a venue for banks to continually try to fuck each other out of a few tenths of a percentage point, then I have to pay extra to cover this fuckage.
I don't know how much this will actually cost me -- probably very little in fact (because I don't have very much money to begin with). But investment banks lately seem capable of perverting every market (home mortgage, foreign exchange, commodity futures, ...) into a free-for-all.
What if we made a law that investment banks could only trade by betting on games of Monopoly or Settlers of Catan or something? I don't think it would work; it would be too close to zero-sum for the banks. It seems pretty clear that the banks need a steady supply of real people whose vital interests are actually on the line to anchor the markets in which they play their demented games. It's in that sense that the parasitism in this and every other case seems perfectly analogous.
posted by dendrochronologizer at 6:17 AM on November 15, 2014 [1 favorite]
I'm a person who is moving internationally in the next couple of months. I have a single-digit number of thousands of dollars that I need to turn into pounds. The only way I can do this is by getting a financial company to do this for me. When the currency market is a venue for banks to continually try to fuck each other out of a few tenths of a percentage point, then I have to pay extra to cover this fuckage.
No, you don't. There's a thing in trading, the bid-ask spread. You will be familiar with it from going to Thomas Cooks to change money when travelling abroad --- it's the difference between the rate at which the exchange will buy currency off you (bid) vs. the rate at which they will sell currency to you (ask). That is, if you go to them and say "I want 100€, please" they will say "great. Give us $120." Whereas if you go to them and say "here is 100€. I would like US dollars in exchange," they will say "great. Here's $110."
The bid-ask spread for you as a retail customer changing money at a bank is measured in dollars and cents --- that is, a bank might charge you 10% more to sell you Currency X than they'll give to buy Currency X off you.
Bid-ask speads on the Forex are measured in pips. Pips are one-tenthousandths of one percentage point. Instead of the bid ask for Euros to dollars being 1.2-1.10, as in our example, on forex it's 1.0002-1.0001.
Or in other words, you are not playing at a level where these manipulations could possibly affect your bottom line. Your own bank is already taking an exponentially more massive chunk out of your pocket than any fluctuations caused by manipulation in the Forex market would cause to the price you're getting when you exchange money while travelling. Now, if you were looking to exchange say $1,000,000 instead of a couple grand, you too could have access to forex, and at that point might be at risk of getting cheated out of $60 on your million-dollar trade.
posted by Diablevert at 7:07 AM on November 15, 2014 [2 favorites]
No, you don't. There's a thing in trading, the bid-ask spread. You will be familiar with it from going to Thomas Cooks to change money when travelling abroad --- it's the difference between the rate at which the exchange will buy currency off you (bid) vs. the rate at which they will sell currency to you (ask). That is, if you go to them and say "I want 100€, please" they will say "great. Give us $120." Whereas if you go to them and say "here is 100€. I would like US dollars in exchange," they will say "great. Here's $110."
The bid-ask spread for you as a retail customer changing money at a bank is measured in dollars and cents --- that is, a bank might charge you 10% more to sell you Currency X than they'll give to buy Currency X off you.
Bid-ask speads on the Forex are measured in pips. Pips are one-tenthousandths of one percentage point. Instead of the bid ask for Euros to dollars being 1.2-1.10, as in our example, on forex it's 1.0002-1.0001.
Or in other words, you are not playing at a level where these manipulations could possibly affect your bottom line. Your own bank is already taking an exponentially more massive chunk out of your pocket than any fluctuations caused by manipulation in the Forex market would cause to the price you're getting when you exchange money while travelling. Now, if you were looking to exchange say $1,000,000 instead of a couple grand, you too could have access to forex, and at that point might be at risk of getting cheated out of $60 on your million-dollar trade.
posted by Diablevert at 7:07 AM on November 15, 2014 [2 favorites]
Here comes a candle to light you to bed,
Here comes a chopper to chop off your head.
posted by Herodios at 7:10 AM on November 15, 2014
Here comes a chopper to chop off your head.
posted by Herodios at 7:10 AM on November 15, 2014
Or in other words, you are not playing at a level where these manipulations could possibly affect your bottom line.
So what you are saying is that if someone can figure out how to take 1/10 of a cent from, say, the bank account of every person in a country, that isn't stealing because no one will notice?
The whole reason this racket works is because they can steal a tiny amount of money off of literally trillions of dollars in transactions.
posted by JackFlash at 7:36 AM on November 15, 2014 [2 favorites]
So what you are saying is that if someone can figure out how to take 1/10 of a cent from, say, the bank account of every person in a country, that isn't stealing because no one will notice?
The whole reason this racket works is because they can steal a tiny amount of money off of literally trillions of dollars in transactions.
posted by JackFlash at 7:36 AM on November 15, 2014 [2 favorites]
Another way this illegal manipulation of market prices affects "real people" is via mutual funds, pension funds, etc. The funds ordinary people invest in for retirement are just as much victims (or benefactors) of forex rate manipulation as anyone else.
I think the LIBOR scandal is worse, since those rates were literally the benchmark for so much other debt in the world. But foreign exchange rates are critical for global finance too.
If you chopped off your friendly fruit trader's legs, he couldn't walk to the fruit market any more and would have a harder time stealing from you. Or maybe just cut out his tongue so he couldn't collude with other fruit sellers.
posted by Nelson at 7:53 AM on November 15, 2014
I think the LIBOR scandal is worse, since those rates were literally the benchmark for so much other debt in the world. But foreign exchange rates are critical for global finance too.
If you chopped off your friendly fruit trader's legs, he couldn't walk to the fruit market any more and would have a harder time stealing from you. Or maybe just cut out his tongue so he couldn't collude with other fruit sellers.
posted by Nelson at 7:53 AM on November 15, 2014
herda05: "but at what point they moved from a conflict of interest (in the non-legal sense of just multiple competing interests), which happens all the time, to price fixing was a spectrum."
I think at this point the financial sector's high margin areas revolve around creating and abusing conflicts of interest. It's probably not a plan, but a cycle:
1. Bank invents a new security / product, inevitably rife with conflicts of interest.
2. Announce an earnings surprise from high margins as a sole provider in said market.
3. Competitors hire away your staff in an attempt to build their own product desk for this market and join the windfall.
4. Margins, in buyer visible forms like omissions, and expense ratios, etc drop.
5. Traders, whose personal capital of expertise is now wrapped up in this market, seek ways to reverse that trend.
6. The network of former coworkers slowly works out a plan, usually exploiting the conflicts of interest created in that specific market while still within the boundaries of regulations, arguably.
7. Cartel behavior succeeds in enriching traders in firms for a while, but few cartels succeed in the long run.
8. Cartel behavior allows members to undercut the competition, further driving visible margins towards zero, and non-cartel participants have to explain why the trading desk is losing money, and eventually bow out.
9. Eventually a defector emerges, or the regulators accidentally discover the collusion.
10. Regulators alter rules to prohibit specific behavior, while still allowing the base conflict of interests to persist.
11. Loop to step 4.
Breaking the cycle likely requires buyers and sellers to ask for some important things in step 1, like fiduciary duty.
posted by pwnguin at 2:42 PM on November 15, 2014
I think at this point the financial sector's high margin areas revolve around creating and abusing conflicts of interest. It's probably not a plan, but a cycle:
1. Bank invents a new security / product, inevitably rife with conflicts of interest.
2. Announce an earnings surprise from high margins as a sole provider in said market.
3. Competitors hire away your staff in an attempt to build their own product desk for this market and join the windfall.
4. Margins, in buyer visible forms like omissions, and expense ratios, etc drop.
5. Traders, whose personal capital of expertise is now wrapped up in this market, seek ways to reverse that trend.
6. The network of former coworkers slowly works out a plan, usually exploiting the conflicts of interest created in that specific market while still within the boundaries of regulations, arguably.
7. Cartel behavior succeeds in enriching traders in firms for a while, but few cartels succeed in the long run.
8. Cartel behavior allows members to undercut the competition, further driving visible margins towards zero, and non-cartel participants have to explain why the trading desk is losing money, and eventually bow out.
9. Eventually a defector emerges, or the regulators accidentally discover the collusion.
10. Regulators alter rules to prohibit specific behavior, while still allowing the base conflict of interests to persist.
11. Loop to step 4.
Breaking the cycle likely requires buyers and sellers to ask for some important things in step 1, like fiduciary duty.
posted by pwnguin at 2:42 PM on November 15, 2014
The use of a position of privileged information to make money used to be the definition of what it meant to be a trader. At some point in the future, it is going to be the definition of what it means to be a criminal. And right now, we’re in the grey area where the boundaries of what constitutes the use of privileged information are being defined.As an outsider to the financial world, this is something I've always kind of wondered about, because it seems to speak of a broad but unspoken shifting consensus on what the markets are for.
Take insider trading of stock (as a simpler example of using privileged information to make money). Why is it wrong, and how wrong is it? That seems to depend on what you think the markets are for. If you consider the markets as a way to use the ‘wisdom of crowds’ to derive somewhat-accurate price signals about the relative values of things (dollars and shares, or dollars and euros), then it's not clear that there's anything wrong with insider trading— it's arguably beneficial or even necessary. If the markets are a streamlined way to buy and sell fractions of enterprises, then insider trading starts to look dubious, but it's not clear to me that it's necessarily wrong. If the markets are a way to engage in capitalism— to have your money make more money without personally engaging in labor— then insider trading is a bad thing, but you could still make a shred of an argument for caveat emptor. If the markets are essentially a sport or a game of chance, a rich person's version of football bets or poker or craps, then insider trading is clearly cheating and is wrong. (I'm not sure what the view is if the markets are considered a bizarre way to issue crowdfunded business loans.)
So if, as Davies suggests, the morality of trading is shifting towards forbidding the use of privileged information, does that mean the consensus on the "purpose" of markets is shifting too?
posted by hattifattener at 4:01 PM on November 15, 2014
the morality of trading is shifting towards forbidding the use of privileged information
This isn't about the morality of trading. It's important to understand the difference between brokers and traders. Traders are supposed to compete with traders. Nobody pays them a fee. They trade for their own advantage. Brokers, on the other hand, are paid a fee by customers to get the best price possible from traders. They are supposed, or at least should, act in the best interest of the customer because the customer paid them for this service.
The problem occurs when brokers and traders together conspire against the customer. That is stealing. The broker is not acting in the customer's interest to get the best price. They are acting in their own interest against the person who paid them a fee. That is what happened in this case.
However, financial lobbyists have worked to blur the line between brokers and traders. Brokers do not have a legal fiduciary duty to customers. They do not have to act within the customer's best interest. They are legally allowed to steal from customers by arranging trades in which the broker benefits at the expense of the customer.
posted by JackFlash at 4:25 PM on November 15, 2014
This isn't about the morality of trading. It's important to understand the difference between brokers and traders. Traders are supposed to compete with traders. Nobody pays them a fee. They trade for their own advantage. Brokers, on the other hand, are paid a fee by customers to get the best price possible from traders. They are supposed, or at least should, act in the best interest of the customer because the customer paid them for this service.
The problem occurs when brokers and traders together conspire against the customer. That is stealing. The broker is not acting in the customer's interest to get the best price. They are acting in their own interest against the person who paid them a fee. That is what happened in this case.
However, financial lobbyists have worked to blur the line between brokers and traders. Brokers do not have a legal fiduciary duty to customers. They do not have to act within the customer's best interest. They are legally allowed to steal from customers by arranging trades in which the broker benefits at the expense of the customer.
posted by JackFlash at 4:25 PM on November 15, 2014
hattifattener: "Take insider trading of stock (as a simpler example of using privileged information to make money). Why is it wrong, and how wrong is it? That seems to depend on what you think the markets are for.
The insider trading prohibition is not about market price signals, returns on investment, or about fair gambling. It's about expanding the number of market participants. Information asymmetries cause people to revise their estimates downward. An equities without insider trading shift the equities demand curve up, a desirable feature for investors. And it leads to more companies successfully getting "bizarre crowdfunded business loans."
posted by pwnguin at 7:38 PM on November 15, 2014 [1 favorite]
The insider trading prohibition is not about market price signals, returns on investment, or about fair gambling. It's about expanding the number of market participants. Information asymmetries cause people to revise their estimates downward. An equities without insider trading shift the equities demand curve up, a desirable feature for investors. And it leads to more companies successfully getting "bizarre crowdfunded business loans."
posted by pwnguin at 7:38 PM on November 15, 2014 [1 favorite]
History of banking misdeeds and fines
The only conclusion here is that the banks treat the fines as the cost of doing business.
posted by adamvasco at 9:49 AM on November 16, 2014
The only conclusion here is that the banks treat the fines as the cost of doing business.
posted by adamvasco at 9:49 AM on November 16, 2014
For those that missed it and want to know how the legislature is looking after the interests of its citizen bankers check out this recent FPP
posted by adamvasco at 9:35 AM on November 17, 2014
posted by adamvasco at 9:35 AM on November 17, 2014
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posted by dmt at 3:46 AM on November 14, 2014 [6 favorites]