Is Forex Manipulated? Unveiling the Truth

Is Forex Manipulable? It's a more than legitimate question. Moreover, the manipulability of markets is one of the worst fears that grips "small" traders, the so-called retail traders. And rightly so: if a market is manipulable, any attempt at analysis is in vain, and the signals acquired through the usual study activity prove to be false. This happens even when the trader has put in effort and has not actually made mistakes. In this article, we will try to understand whether Forex is manipulable or not, also analyzing the entities that would have the greatest interest in extending their control over prices.

Forex and Manipulability

In reality, there are several reasons why Forex can be considered a non-manipulable or hardly manipulable market. Each of these reasons, in fact, corresponds to a specific characteristic of Forex itself. Let's analyze them together. The participants are a heterogeneous mass. Forex is one of the most participated and frequented markets in the world. Perhaps the first from this point of view. Simply put, investors are numerous and belong to the most diverse categories. Both heterogeneity and numbers, in some way, provide a certain protection from the risk of manipulability. There are numerous and conflicting interests at stake, and even just using logic, one discovers that when interests are many and opposed, they somehow cancel each other out, determining a certain state of equilibrium. Forex is an extremely liquid market. In fact, it is the most liquid of all. Even more liquid than the stock market, which still retains an aura of seemingly unassailable authority. According to recent estimates, the turnover of Forex Trading consists of something like 5 trillion dollars a day. To put it in perspective, we are talking about a monetary mass equal to twice the Italian public debt (the third in the world), every day. This safeguards, at the very least, against a certain type of manipulation, namely that based on colossal orders. Even if a particularly wealthy entity (think of commercial banks) were to invest huge amounts of money, this would still be insufficient to act with significant force on prices. In fact, in living memory, there is only one successful attempt in this sense, moreover far back in time (we are talking about almost thirty years ago). Forex is an interdependent market. The relationships between currencies depend significantly on what happens in other markets and, even more so, on what happens in politics, monetary policy, and the real economy. The presence of numerous factors at play safeguards against manipulation attempts. Of course, there is the discourse on central banks to consider. In fact, they have the cost of money in their hands. In this case, however, one cannot speak of manipulation at all. We will delve into this topic (actually very thorny) in the next paragraphs.

Who Has an Interest in Manipulating the Forex Market?

We have seen how some intrinsic characteristics of the currency market safeguard it from manipulation attempts, or at least make it less subject to manipulation than other markets. The reference is to the enormous liquidity, the heterogeneity of investors, and the presence of numerous market movers. However, this does not mean that attempts are not made, even if only in good faith. Potentially, despite the elements just mentioned, some could succeed sooner or later. Or, perhaps, behind some hardly understandable dynamics, there is already a manipulative action on prices. Therefore, it is good to investigate the entities that, more than all the others, would have interests and means to act directly on prices. The first entity to consider is represented by central banks. They all have a very specific purpose: to keep inflation under control. That is, to keep it high enough to support consumption and economic activities, but not so high as to erode purchasing power. Now, all central banks have a very powerful tool to achieve this goal: changing interest rates. In fact, every time the interest rate is changed, prices move almost structurally. Can it be considered manipulation? Not really. Firstly, because central banks perform a sacrosanct and useful function. Secondly, because interest rates themselves represent a market mover, and as such are characterized by marked readability. Traders, in fact, have all the tools to predict monetary policy. It must also be said that central banks themselves declare the fate of interest rates in advance, precisely so as not to excessively disturb the markets. Then there is another entity capable of directly modifying prices: that represented by very large commercial banks. Essentially, because they have the possibility, at least theoretically. They possess an extraordinary amount of liquidity, which could upset the markets. Forex, however, as we have seen, defends itself very well in this respect. The objective, in this case, would be profit for its own sake, which is a strong motivation but not so strong, given the many sources of profit that a commercial bank can take advantage of. Finally, there are two other manipulations, or approaches to manipulation, that could involve Forex. The first is insider trading, which, however, is a crime in all respects. It consists of the classic conflict of interest: those responsible for a market mover invest in the asset influenced by the market mover. Or, conversely, there is an illicit leak of news, such that an investor acts with a completely undeserved advantage over other traders. The other manipulation does not concern the market but individual traders, and has market maker brokers as protagonists. These, by definition, "modify" prices, but only for their own traders. The difference between real prices and prices visible on the platform, called spread, represents the (legitimate) profit of the broker. However, when the declared spread does not correspond to the truth, one can speak of real manipulation. This obviously does not create distortions in the market but, very simply, creates damage to the individual trader, that is, to the client of the "manipulative" broker. It is quite simple to protect oneself from this risk: it is sufficient to choose the broker carefully, first of all verifying the management of spreads.