Entries Tagged 'Word of The Day' ↓

Word of The Day: Ramping

Ramping—what it means for financial-crime prosecutions….


A number of financial sector frauds are now being reported in the news.

Notable is the arrest of the HSBC executive in charge of global forex cash trading, and an outstanding warrant for a former executive at that bank.

Forex is short for foreign exchange of currencies. This is the biggest of the global financial markets. Trading in the forex market averages 5.3 trillion dollars per day!

HSBC is a British bank, one of the largest investment banks in the world, headquartered in London. Prior to the Financial Crisis of 2008, HSBC was a leader in bank transfers.

This was back in the day when bank transfers weren’t as easy to do as now. HSBC acted as an intermediary, transferring a depositor’s money from one bank or credit union into its own bank and then on to another bank or credit union.

Forex is a similar operation. An intermediary bank accomplishes a transfer of one party’s currency into a different currency that is used by another country.

Usually forex transactions are a matter of exchanging smaller countries’ currency for the big five global currencies; the US dollar, EURO, Yen, British pound, or Swiss Franc.

For business transactions, forex facilitates trade between two or more parties operating in different country currencies.

International businesses; big investors called “money-market traders”; and tourists, all depend heavily on the forex market to “get to where they’re trying to go” financially or in person.

HSBC investigated the alleged fraud, a $3.5 billion purchase of sterling in 2011 for the Cairn Energy PLC, one of Europe’s leading independent oil and gas exploration and development companies, and found no breach of HSBC’s own code of conduct.

However, after the Financial Crisis of 2008 turned over a lot of financial rocks and slimy beings scurried out into the light, HSBC was alleged to have been involved in several kinds of shady dealings. Continue reading →

Word of The Day – Comparative Advantage

Comparative advantage – a win/win way to trade

Definition: Comparative advantage is gained when two parties each specialize in making a different kind of product and exchange them with the other party


When asked during the Town Hall debate about how they would bring back jobs to America, the candidates for President of the United States had two very different answers. The distinction between the two could be crucial for the next generation of American workers.

(1) Romney said he would “level the playing field“. This was in order to make American workers more competitive with workers in other countries. This attempt to increase equality of American and foreign workers apparently means many Americans would wind up being paid the same low wages as foreign workers. Moderator Candy Crawley questioned whether it would even be possible to accomplish this. Could Americans live on the pittances foreigners get paid? I wondered if this goal is the reason there is pressure to build a wall along our border with Mexico to keep Mexican day workers out of the US. Should we expect to see unemployed Americans soon be encouraged to take these jobs at the same low wage rates?

(2) Obama said that we would need to use education and training programs to raise the skill levels of American workers so they could be paid more than foreign workers. This is an economic model of domestic and foreign trade called “comparative advantage“. The solution gives workers in both countries (or regions of a country) a unique competitive advantage. We can trade high-end products made by skilled Americans to other countries. Other countries can trade cheap products made by unskilled foreign workers to us.

As an economic theory of trade, comparative advantage makes sense. In the real world, with many countries trading, it may not be so simple.

Word of The Day – Voice Brokers

Voice Brokers – Judges on American Idol or The Voice?

Definition: Interdealer brokers for OTC derivatives such as Forex, Commodities, Futures and Swaps

Most of us worry about automated trading – high frequency trading where computer algorithms govern the process, i.e., another flash crash. Would you believe that the US government is more concerned bout the good old-fashioned way of trading?

The term, “voice brokers” conjures up an image from TV shows and movies where brokers mill around on a stock exchange floor waving pieces of paper in the air while shouting out orders. It’s not that chaotic now, but voice brokers indeed use their voices to create orders, usually on a phone or on squawk boxes, an intercom speaker on their desk that they use to communicate with banker clients. They deal with trillions of dollars of OTC (over-the-counter) derivatives every day.

The US government began closely scrutinizing voice brokers this year because it suspects they may be rigging Forex (i.e., currency exchange) deals. This scrutiny was set in motion by the Libor scandal early this year, where brokers from around the world were accused of separately and perhaps jointly trying to rig Libor (London central bank) lending rates. The Financial Times ran an in-depth article, “Libor probe shines light on voice brokers’ on February 17, 2012.

Voice brokers are also called “interdealer brokers”. These brokers used to discuss prices asked by buyers and sellers but now computers can do that. Instead, inderdealer brokers make deals on behalf of clients by matching buyers and sellers for each particular transaction. They have information about all the buyers and sellers in their market.

A conflict of interest arises because interdealer brokers have banks paying them commissions. Even though they serve traders at a lot of banks who want to do swap deals, voice brokers will often alert the bank paying them a commission first or give that bank more details than other clients when a lucrative deal comes across the voice broker’s desk.

Finra (the US Financial industry Regulatory Authority) brought a $2.8 million suit against ICAP, the world’s biggest interdealer, when a former employee attempted to influence fees on credit default swaps in 2009. The Financial Times reports that Finra filed more cases against voice brokers in 2010.

OTC trading could be fully automated and it would be more transparent to traders, but powerful interdealer brokers are raising their voices against that. Voice brokers have lobbied hard against the Dodd-Frank bill, hoping that their privileged jobs and commissions can be saved when the US reforms credit default swaps trading. For how these brokers plan to cope with the coming changes from Dodd-Frank, see  “Can the boutique brokerage survive Dodd-Frank?” (Original headline: Endangered species?”) posted May 3rd at Risk.net.

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