Forex industry insider

One of the biggest insider trading cases in Australian history puts the spotlight on the forex market. Ben Butler and Georgia Wilkins report. Someone industry most likely one of the globe-spanning banks that back the secretive retail forex market - must have been on the wrong end of a forex of now notorious insider trades allegedly perpetrated by a pair of something Australian university friends. But, a week after year-old NAB employee Lukas Kamay and his mate, year-old Australian Bureau of Statistics worker Christopher Hill, faced court charged with offences that could see them jailed for 10 years, global financial institutions have yet to figure out which of them lost out in the industry trades.

Either that, or they're just not telling. Most of the alphabet soup of banks touted as liquidity providers by the two forex brokers used by Kamay, Pepperstone Financial and AxiTrader, declined to comment. However, it is believed industry legal team at BNP Paribas is still investigating whether it was exposed to one of the trades.

The ambiguity around who lost out is perhaps to be expected in an industry that, despite its vast size and glossy marketing that targets retail investors, operates insider outside of the regulatory and media spotlight. And Australia is a key part of this global circus, punching above its weight due forex the strength of its economy and the high yield available to investors.

By submitting your email you are agreeing to Fairfax Media's terms and conditions and privacy policy. The dollar ranks fifth on the list of most traded industry, and the Australian-US dollar is the fourth-most-traded currency pair in the world, according to the Reserve Bank.

It's a trade that has long been a trap for the unwary. In the early s, farmers desperate for finance plunged forex the forex market, snapping up low-interest loans denominated in Swiss francs.

But the loans, essentially a bet on the Aussie dollar remaining strong against the franc, went horribly wrong when the dollar plunged in andcosting some borrowers their farms.

Industry figures say the foreign exchange market is secretive and unregulated by its very nature, as most transactions occur on an over-the-counter basis, through a dealer or broker, rather than a central exchange. This means that any information available to regulators and consumers is limited, particularly compared with other markets such as the sharemarket, where companies are required to release information to investors under continuous disclosure rules.

Complicating matters, insider most retail clients see as forex does not actually involve buying and selling foreign currency; it is instead a bet with the broker as to the direction forex which the currencies involved move. Those brokers then hedge their exposure insider trades through the big banks that provide their liquidity. One source says the over-the-counter market, including foreign exchange, was ''self-regulated and always has been''.

Forex despite the risks, forex is extremely popular with day traders seeking a fresh thrill away from the equities markets. And with most of the big brokers offering a mobile phone app, traders can win or lose while at the hairdresser or waiting for the bus. According to documents filed with the court, Kamay did just that, using his iPhone to bet on movements of the Australian dollar just moments before the ABS put out key economic statistics.

The insider trading busts have given the forex market more attention, even if it's not the kind of attention the industry had been seeking. Before the dramatic arrests, Pepperstone had been gathering a few finance media headlines as a potential float on the Australian Securities Exchange, while Sky News viewers might occasionally have seen ads for a UK group called Knowledge to Action, which spruiks training courses designed to turn clients into gun forex traders.

Knowledge to Action's website features plenty of its tanned founder, Greg Secker, ''a multimillionaire by his mid 20s'', and success stories from graduates of its courses - including a Youtube industry of a ''trader success day'' filmed on a yacht in Sydney Harbour.

Meanwhile, broker Halifax Investment Services promotes itself using a celebrity ''ambassador'', former Test cricket captain Mark ''Tubby'' Taylor. According to Taylor, who also advertises Fujitsu airconditioners, Halifax is pretty much the greatest thing since sliced bread.

It seems the US regulator in charge of foreign exchange markets, the Commodity Futures Trading Commission, disagrees. Last month, after being taken to US Federal Court by the commission, Halifax agreed to a permanent injunction barring it from accepting American customers. Following the global financial crisis, the US brought in strict new laws cracking down on the sale of insider financial products to ordinary mum and dad investors. The commission alleged that because Halifax allowed US residents to apply for an account, it was in breach of insider rules.

Halifax said it was happy with the outcome because it did not admit to any wrongdoing and had in any case recently bought a US company through which it could legally do business with Americans. Halifax has also run into trouble with its local regulator, the Australian Securities and Investments Commission, which in April last year raised concerns of a laundry list of problems at the broker, including inadequate supervision of staff, inadequate breach reporting and deficiencies in complaint handling.

Under an enforceable undertaking with ASIC, Halifax agreed to hire an independent consultant to overhaul its risk management procedures and assess the competence of its staff. But regulation in the US appears tougher than in Australia, where retail forex houses are required to have net tangible assets of 10 per cent of their average revenue, half of which must be in cash.

It appears unlikely one of the forex providers Kamay used to carry out his alleged insider trades, AxiTrader, would meet the strict US standards. Customers industry also warned that AxiTrader may use client money to ''hedge our exposure to you … or hedge our exposure to other clients''. This is contrary to standards set by the Australian CFD Forum, which represents the big contracts for difference providers, and says providers should hold client money in completely separate bank accounts.

AxiTrader, which also provides CFDs, opposed the standard, which was approved by the competition regulator on Thursday. In a submission to the Australian Competition and Consumer Commission, it said the move was motivated by the ''self-interest'' of the big CFD groups. Business Day chased AxiTrader all week in an attempt to find out what had insider in the Kamay case and whether the allegedly dodgy trades put other customers at risk.

Calls to the company and emails to its head of trading, Emanuel Georgouras, went unanswered until late on Thursday afternoon, when a man who refused to give his name phoned to say a statement from AxiTrader was on its way. In it, AxiCorp chief risk officer Justin Friemann said the company's ''risk management practices were strictly applied during the relevant period and that all of the relevant trades were automatically fully hedged''. AxiCorp is subject to liquidity requirements under conditions of its Australian Financial Services Licence and at no stage were those conditions at risk.

AxiTrader ''can confirm that, following internal assessments of a series of trades, AxiCorp reported suspicious activity to the Australian Federal Police, AUSTRAC and [ASIC],'' he insider. The transparency of the forex market could change under new rules being introduced by ASIC. Insider will require institutions to report information on derivatives trading to relevant authorities and the public. The last phase will be introduced in October, requiring smaller entities to commit to the standards.

The G20 has also moved to improve the integrity of the foreign exchange market, with industry spinoff, the Financial Stability Board, announcing in February its intention to review the setting of foreign exchange benchmarks. The review is chaired by Industry Bank assistant governor Guy Debelle, and will report its findings forex the G20 meeting in Brisbane in November.

David Lynch, chief executive of the Australian Financial Markets Association, welcomed the efforts to improve transparency. And the corporate regulator is currently investigating potential manipulation of foreign exchange benchmarks in Australia, following similar action by authorities overseas.

Regulators have focused on the potential forex of benchmarks relating to the euro, US and Australian dollar. ASIC announced the probe in March but has not specified the focus of its inquiries or which banks would be targeted. However, it is believed the regulator has widened the inquiry to take in other potential misconduct in the forex market. ASIC has also set up working groups to look at online retail forex, especially overseas players who hold an Australian financial services licence and target insider investors.

If the big banks allegedly burnt by Kamay do manage to figure out which among them suffered a financial loss, they may be able to claw back the money. Juliette Overland, at the University of Sydney business school, said such action would be possible under the Corporations Act. Whatever the outcome for Kamay and Hill, it seems the forex market's days in the shadows may be coming to an end.

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