Barclays, Deutsche Bank, UBS AG, Royal Bank of Scotland, and Goldman Sachs, all of which make up almost half of the foreign-exchange transactions, are part of this overhaul in currency trading.
The banks are attempting to make it more difficult for dealers to profit off of information from customers, which should be confidential. But while banks will restrict access to information about client orders, they are still being criticized because the new move doesn’t prevent employees from talking to each other and sharing information.
All of this action is based on accusations that confidential client information is being shared and used by big money managers to control and manipulate currency benchmarks.
The Effectiveness of the SEC
The big banks see the writing on the wall. They know the SEC is going to impose new regulations, and they are probably making a smart preemptive move — after all, these banks would much rather write their own regulations.
Besides, the SEC better at following the parade — coming in after the fact to impose new rules and regulations.
And aside from some of the burdensome and inefficient regulations put in place by the SEC, there is another unfortunate side effect of the agency: It gives people a false sense of security.
Think about the Bernie Madoff scandal. Here is a guy who was ripping off tens of billions of dollars, but even though the SEC was tipped off on the scandal, it still didn’t catch it. It swooped in after the fact — after the scandal came to light. In other words, it was useless.
Actually, it was worse than useless. If the SEC didn’t exist, or if it didn’t pretend to protect investors, then maybe fewer people would have been as trusting of Bernie Madoff. Maybe people would have done a little bit more due diligence, and perhaps those who suspected the foul play would have been more vocal and sought other avenues for exposing the scandal.
The point here is that you should never depend on the SEC or any other government agency to protect you. You need to do your own homework or find other trusted sources. It doesn’t matter if you are investing in a hedge fund, the currency markets, or anything else.
Manipulation and Insider Trading
I often wonder how much insider trading really benefits those that do it. In actuality, it could be argued that everyone is doing insider trading to some extent. It’s just that some do it to a greater degree than others.
Whenever you invest in something, you are doing it for your own special reasons. Maybe it is based on something your read. Maybe it is a gut feeling. Maybe you analyzed a company’s financial statements, or maybe you walked into a store, saw that it was really busy, and decided to invest in the stock. No matter the reason, the information you have is not necessarily available to everyone else. We are all in unique positions.
But in terms of investing based on confidential information that is only available to a select few, I still wonder how much it helps. You still have to read the information correctly and put it to good use. You can still be wrong.
Regardless of new bank or SEC rules, there is always going to be insider trading and manipulation in markets.
We live in a digital world in which computers do most of the trading. There are programs that time the markets and make trades in fractions of a second. You can’t beat these computers.
But that doesn’t mean you shouldn’t make trades or invest. You just shouldn’t expect perfection. When you place a “buy” order for a stock, a currency, or anything else, you will probably get ripped off by a fraction of a cent when you buy. The super computers are going to take that fraction of a cent in profit.
When you invest, you need to figure out if it is a sound investment. If you are looking to buy and hold, you will be more worried about the long-term trend than the fraction of a cent you lose. And manipulators are not going to care if you buy long or short. Unless you are investing a lot of money in something with low volume, then your money is going to mean almost nothing to the market as a whole.
Investing in Currencies
It seems there are constant allegations of manipulation and insider trading. Most recent were allegations of manipulation in the gold and silver markets, but there are also allegations in stocks and bonds.
Of course, the biggest manipulation by far is coming from the Federal Reserve. Everything it does is manipulation, from interest rates to the money supply.
If you are deciding whether or not to invest in currencies, I wouldn’t do it based on manipulation, new bank rules, or new SEC rules. Your reasons should be more fundamental.
For example, if you see that the Japanese government continues to accumulate massive debt and is ramping up its monetary inflation, these would be good reasons to short the yen, especially if you expect it to continue for a while. Conversely, if you believe Japan is possibly going into recession, this may be a good reason to invest in yen.
If you are planning to invest in foreign currencies, I would suggest it be for speculation purposes and short-term profits.
If you are an American looking to hedge against the U.S. dollar (which you should), I don’t recommend buying foreign currencies for this reason. After all, all of the foreign currencies are fiat currencies, just like the dollar. They are not backed by anything except the faith and credit of each government, which really means nothing.
In other words, it is a race to the bottom right now between virtually all of the major currencies of the world. Some are simply worse than others.