18 Jun Rand Manipulation
Rand manipulation: Staying Safe In The World Of Forex
In 2018 South Africans were shocked when news of the great bread scandal broke. Tiger Brands, the largest consumer food company listed on the JSE was one of several enterprises which artificially manipulated the price of bread by fixing the price in collusion with its rivals.
The South African Food Sovereignty Campaign in partnership with the Consumer Action network had accused manufacturers and retailers of inflating and fixing the price of bread, and the Competition Commission subsequently verified these claims.
It seems almost absurd that something like bread could be the cause of such a scandal, and yet the cost of the scandal saw Tiger Brands alone fork out R98,8 million in penalties, with Foodcorp, Pioneer Foods and Premier Foods also fined for their connivance.
Earlier in 2020 another cataclysm linked to price manipulation saw the implosion of the oil and petroleum markets. Of course in this case, the manipulation wasn’t unlawful, but the collapse of the oil market due to a price war saw the biggest decline in global consumption in one month. The decline was seven times bigger than the previous big quarterly decline after the 2008-2009 financial crisis.
The news that banks across the world (and 5 local banks) had manipulated the Rand-Dollar exchange rate was therefore note entirely inconceivable, but it is another nail in the financial coffin of 2020 which a country in crisis doesn’t need.
Manipulation déjà vu
Of course this is not the first time that bread price or currency manipulation has occurred.
In 2018 Canada saw its own bread scandal when the Canadian Competition Bureau found seven Canadian bread companies guilty of bread price fixing. Penalties at the time ranged from $25 million to a 14 year prison term.
In 2003 China was accused of manipulating exchange rates by buying and selling Yuan on international capital markets at a fixed price. China was first placed on the US currency manipulator list from 1992 to 1994. South Korea and Taiwan were dubbed manipulators in 1988, India in 2017, and at the end of 2019 China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam were still on this US list with Switzerland found to be the biggest manipulator of them all.
In South Africa, a 2015 investigation by the Competition Commission (concluded in 2017) established that a dozen local and international traders colluded in manipulating the Rand-Dollar exchange rate. Among those named were Absa, Standard Bank, Citibank and the Bank of America.
The manipulation was achieved by false sales to drive up demand and agreement between traders to cease trading for specific periods of time. Traders subsequently traded dollars for rands at a fixed price.
As the first to come forward, Absa was given immunity, while Citibank paid R70 million in penalties. Others refused to cooperate with the investigation by raising issues around jurisdiction and technicalities, and it is this refusal to cooperate which has incited the Competition Commission to act far more sternly and decisively since. In fact, many of the allegations disclosed in June 2020 stem all the way back to this very enquiry launched in 2015. In 2019 the banks had stalled the commission’s case after the Competition Appeal Court ruled that the Competition Commission had to provide new charge sheets with further clarification. Which is exactly what the commission has done.
And perhaps this very ‘victory’ by the banks in compelling the commission to provide more details on allegations and charges is the very thing that will sink them. For in providing further clarification, the commission had also discovered additional transgressions and culprits. A dozen culprits increased to 17, and as of 2020 it had jumped to 28. The investigation further noted that in addition to the fixed exchange rates the manipulation related to bids, offers, bid-offer spreads, spot exchange rates, the terms and margin of executing client orders at the fix and allocating customers in the USD/ZAR currency pair.
Additional culprits named by the commission include the Nedbank Group, RMB Holdings, FirstRand Bank and Standard Americas Inc.
Why is exchange rate manipulation illegal?
Of course many people who have exchanged currencies may wonder why manipulation of exchange rates would be illegal. One can, after all, enquire with different forex agents at any given time and receive marginally different exchange rates.
The problem comes in where large enterprises which dominate a market artificially manipulate rates as this discourages free market value of a currency and increases the ‘profit’ they make from exchange rates over time. The other problem is that currency manipulation gives a false view of the state of a country’s economy and even drives an economy towards this warped view.
Exchange rates and currency fluctuations have a significant impact on economic performance of countries, inflation, interest rate differentials, capital flows, industrial competition, job security and international trade.
A country’s central bank (SARB in our case) relies heavily on the foreign exchange market to determine monetary policy and set key economic variables. This includes the interest paid on home loans, return on investment portfolios, the price of groceries, the influx of foreign travellers, the margins for salaries in different industries, import and export costs and policies, taxation and the country’s trade deficit. If a currency is artificially inflated a nation can lose its competitiveness in international markets, local markets can be flooded with foreign goods and industries will shrink. If a currency is artificially deflated, then a nation will struggle to maintain optimal quality and quantities of imports, consumers will pay more for international goods and salaries will decrease.
The secondary impact of currency manipulation is that institutions found guilty of such illicit behaviour impede investor sentiment not only towards their own business, but the countries within which they operate. Consider, for instance, that some of the biggest financial institutions called out for current transgressions are on the JSE top 40 listed companies. Though the scandal has not had a detrimental effect on shares thus far, it is unlikely that such positive sentiments will prevail and they are likely to see an impact on stocks and share prices. Then there is the impact on smaller forex traders who may have inadvertently been drawn into and impacted by price fixing through no fault of their own. Investigations will undoubtedly extend to them and affect the consumer trust in their services.
Furthermore, for a country like South Africa which relies heavily on foreign funding from sources like the IMF, BRICS New Development Bank, World Bank and the African Development Bank such currency manipulation will undoubtedly impact not only the amount of money loaned to us, but also the interest and terms linked to those loans. Essentially this increases the country’s debt risk.
The IMF has been most vocal about South Africa’s need to weed out corruption and although they have made concessions under Covid-19, it will undoubtedly not take kindly to the SARB’s lack of control over financial institutions and will expect harsh penalties on offenders. Given that South Africa’s R500 billion Covid-19 stimulus package amounts to 10% of our GDP and has drastically raised our deficit, this scandal is definitely not news we wanted to hear in 2020.
How to spot forex scams
For the man on the street who deals with foreign exchange infrequently it can be hard to identify forex manipulation and it also may not be something they generally pay much attention to. But for South African expats operating across borders, foreign exchange is far more pivotal and news of forex scams can have a significant impact on their financial wellbeing.
Tighter regulation has seen far less forex scams and manipulation over the past decade, but a scandal such as this one points out that manipulation is still possible and perhaps even more easily created when the biggest players are involved.
It’s therefore in everyone’s best interest to be aware of the most common scams, even if these don’t occur frequently.
The point-spread scam occurs where bid-ask spreads are manipulated and subsequently result in point spreads differing vastly between brokers. A wide bid-ask spread makes it more difficult to earn profits on trades.
Certain forex robots use a scalping system which allows trading at very small profit, which then shows a high win rate and artificially boosts support for certain market conditions. Once these market conditions return to normal or change, the system suddenly loses more per trade than it wins and can easily wipe out all accrued profits.
A forex signal seller is a broker, firm or asset manager who sends out trade ideas linked to currency pairs, direction, entry price, stop losses and target levels at frequent intervals. Clients use them to identify favourable times to buy and sell currency pairs in exchange for subscription fees or broker fees. Some of these signal sellers require individuals to sign up to specific brokers. This is often an indication that they receive broker kickbacks which means they will push trades on clients irrespective of positive outcome. They will usually want to maintain relative profit to retain clients, but this is not forthcoming and scammers sometimes disappear quickly before losses are identified.
Some traders will tout unbelievable results, and if their portfolio of past results are truly extraordinary, it is also in fact unbelievable. The problem is that new traders in particular are usually not very savvy and prefer to hand over their investment concerns to those they believe to know better. This is not always a problem and most brokers aren’t out to get you, but if traders show results which far exceed those of other traders. Bear in mind that unlike investment portfolios, forex trading results cannot realistically vary too much or over a long period between traders and no trader will have only positive results in their forex ‘portfolio’ or history.
If such results are shown to you, be sure to verify this with independent experts or and conduct your own investigation.
Fake brokers or firms
Additionally, some signal sellers will claim to work with certain brokers who bear frequent positive results, but on further inspection these brokers seem remarkably hard to find or link to any firms.
Or perhaps a trader name-drops a prominent firm or broker and asks you for funds, but when you don’t hear back from them and contact these brokers or firms you realise that the original trader had no links to these legitimate firms at all and has absconded with your money.
Another forex robot scam involves coding ‘robots’ to use algorithms which will produce randomised results within certain margins which mimic legitimate trading. Traders are asked for funds to use these robots which, hypothetically and for the most part, can improve trading through processing data and offering the best trading and exchange strategies. Illicit traders will offer these services to you and through their own coding restrictions or rules force the robots to present believable results.
Of course you’re not paying for any legitimate service and what you’re actually doing is sitting in front of a slot machine and gambling on wins and losses based on no valid number-crunching.
As is the case in the scandal mentioned earlier, scams can be widespread and hard to spot if various big players are involved. Such a scam is not easy to spot. These forex scams require different traders, firms and robots over different jurisdictions to work together in fooling the markets, other banks and their clients to accept certain exchange rates (or margins).
Tips for traders
There are a few things you should remember when trading in currency, using a forex trader or even just exchanging currency every now and then.
- Do your research: As mentioned before, people often believe traders or firms without doing their own research. Legitimate forex providers will yield results on search engines not tied exclusively to their own marketing campaigns, affiliates, websites and social media platforms.
- Understand world politics: Although currencies and exchange rates can fluctuate and vary between traders and jurisdictions, any currency will invariably be linked to the political narratives in the world. Follow the news and be aware of political changes and decisions which will have an impact on a currency. There are, of course, times when you can truly expect great profits on foreign trading, but such trading will occur relatively swiftly over a short period until all traders and markets catch on
- Don’t rely on mainstream media: If you have followed SA News networks of late you will undoubtedly be aware that the state of the Rand-Dollar exchange rate has been reported as remarkably positive and negative every other hour or day. Such results in mainstream media can be legitimate, but it could also merely be a misrepresentation of actual data or a ruse to facilitate quick exchanges.
- Be conservative: If you’re new to forex trading it’s imperative that you remain conservative and sceptical in your trading. Build up relationships with legitimate institutions whom you vet frequently, don’t place all your eggs in one basket and don’t make swift and drastic investments or trades until you understand what it is you’re doing.
Let Rand Rescue assist you
Rand Rescue has a track record of fair trade and legitimate services and we’ve assisted thousands of South Africans with their currency exchange. Unlike other brokers or traders, however, our forex services were initiated as an extension of our principal business – the transfer of savings and investments from SA to other countries.
We don’t promise unrealistic rates as our focus has always been on optimising the yields and mitigating losses for our clients while offering the lowest cost, fastest conversions and best rates available at the time. We will therefore not compromise the interests of our clients through gambling currencies or partnering with illegitimate traders as we are wholly invested in building lasting relationships with each person we assist, irrespective of the type of service.
Let us help you with your forex or other cross border needs. You are under no obligation to retain our services and our initial consultations with you are risk and cost free. Simply leave your details below and we’ll get back to you!
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