Is it really currency manipulation?

With a basic understanding of how global markets function, it’s very difficult to imagine that a currency can be significantly influenced, let alone manipulated. How, then, do you pull this off for an entire decade?

Imagine you wanted to make a special cocktail. The things you would need to make this particular cocktail would be:

• Significant control;
• A common goal; and
• Communication.

Here is some important information to understand before we begin. In currency transactions, there are three main participants: the client (you and I), the brokers (the intermediaries we work through), and the liquidity providers (the banks).

The role of banks and other authorised dealers is to provide the market with what is known as liquidity. This means they are the parties responsible for ensuring that the rands you wish to buy and sell in the market are available when you wish to transact.

Currency markets also have three main liquidity sessions: Asian, American and European. The last of these is the most liquid for currencies. This will come in handy as an ingredient later.

The rand is the 18^th most-traded currency in the world and one of the top five most-traded emerging market currencies (this answers why the ZAR may have been chosen). The caveat is that it is only traded by a few participants, who all know each other.

Now, let’s make that cocktail.

Control

This is your base ingredient, the most important component of your cocktail, from which all the other elements will take their lead. You need significant control to influence any outcomes. The kind of control Pablo Escobar had over the global supply of cocaine; the kind of control Opec currently has over the global oil market. Dare I say it, the kind of control the Italian Mafia has over avocados (that’s an interesting story).

So how do you achieve such control? Easy; you invite all your competitors to a braai and sell them on the idea that a monopoly is better than competing.

As luck would have it, the outcome of the braai is that between the 28 banks, they controlled more than 60% of all the emerging markets trades, with clear access to the remaining 40%. This would make it very easy to control what happens with prices because anyone trying to say otherwise would be insignificant.

Read: 28 banks now in the crosshairs over rand manipulation case

Common goal

The easiest ingredient is this one. Greed and profits will create strange alliances, especially in capitalistic markets. Synergies become easy to find when you know that you’re not the one losing and that each of your partners has enough money not to become a problem when the bill comes.

Communication

This is where the instant messaging ingredient gets stirred in.

A lot of things can be discussed in a chatroom, like which orders belong to which banks, when to time these specific activities to line up with news events, and how to flood the market with dummy orders to create a false sense of activity that will ultimately lead people to believe that there is more demand than there actually is.

Read: The dark and ‘smoke-filled’ chatroom that could sink rogue forex traders

You can plan much better when you have inside information from the group chat. More importantly, when you are caught, everyone pledges a vow of silence and says there is no proof because the WhatsApp group (chatroom) is technically not illegal to have.

How do you know if your cocktail is a hit?

For starters, you would see it in your own till (profits), when a R42 million settlement is seen as the easy way out, or when more than two decades have passed, and there is still a very real possibility of more cocktails being made. Maybe when it takes people six years to find out what was discussed at the braai, and you still don’t know who organised it.

So the short answer is yes – it is absolutely currency manipulation if that’s what you’re choosing to name the cocktail.

Read:
Standard Chartered settles forex rigging case after eight years in court
14 years after the fact, CompCom’s rand manipulation case is nowhere near conclusion