Foreign Currency Trading Scandal

A possible foreign currency trading scandal has come to light with a law suit filed by the Attorney General of the State of New York. The suit alleges that Bank of New York Mellon cheated clients by willfully charging customers for worse currency exchange rates of the trading day than were otherwise available. According to the Attorney General’s office this has been going on for a decade and was brought to light in a “whistle-blower” complaint two years ago. The suit is said to be for $2 Billion USD. Large banks such as Bank of New York Melon trade foreign currencies on behalf of clients such as public pension funds. News reports indicate that the City of New York has joined the suit on behalf of New York City public employee pensioners. The usual type of foreign currency trading scandal to hit the news is a pyramid scheme in which naïve individuals trust an unscrupulous Forex trader. The trader claims to be making very impressive profits which he shows on client account statements. In doing so he attracts new money for his operation and the new money covers his actual trading losses. This is clearly not the case in the alleged foreign currency trading scandal involving Bank of New York Melon. The bank is a major trader in foreign currencies. The issue is one of allegedly “nickel and diming” its clients with poor exchange rates. The lawsuit alleges the intent to commit fraud by the bank in its dealings.

This allegation of a foreign currency trading scandal may or may not prove to be accurate. However, individual Forex traders should take notice as the precise exchange rate at which one trades currency pairs such as the EUR/USD, USD/GBP, or USD/YEN is exactly where profit and loss occur in Forex trading. The point of doing both fundamental and technical analysis of a given currency pair is that traders want to optimize the rates at which they buy one currency with another. Traders often engage in options trading in order lock in today’s currency exchange rate and profit when that rate changes in the near future. In reviewing trading results traders look at the exact rates at which they traded and compare these to the best rates available for a trading day, week, or month. This is a results based audit and helps shed light on just how effective trading of foreign currencies has been. Another means on auditing trading results is to look at the cues traders use in order to buy or sell foreign currencies. Traders look at the timeliness of their responses to changes in trading fundamentals but more importantly their responses to technical trading cues. Technical traders follow trading signals that trigger buy and sell orders. Aggressive traders may often do better than others by trading exactly at the right time. However, no one knows, in advance, what the right time will be. More conservative traders may not make the spectacular profits that aggressive traders sometimes make but they also tend not to crash and burn as often either. It should be noted that a conservative Forex trader is not charged with a foreign currency trading scandal if he pulls the trigger a little later than the competition in making a currency trade. The point is that the Attorney General of the State of New York is going to have to prove in court that the Bank of New York Mellon intended to defraud its customers instead of simply trading conservatively in order to avoid excessive losses, which would have been a foreign currency trading scandal in its own right.