On /r/Australia, Redditor pvtbobble asks: "Soros bets on AUDUSD and wins $19M. When you treat a currency like a horse race and affect the odds/exchange rate, doesn't that mean the system is screwed?" My response as follows.
Quite simply, no.
The key to manipulation is a illiquid pool. You can affect the odds in a horse or greyhound race by betting sufficient size into a small pool in order to sink or raise the odds of particular runners. For example, you might get the public to bet on a false favourite by betting a huge amount on a runner, lure the public in, then cancel the bet. Or, you might raise the payout on your favourite runner by betting on every other runner, lure the public in, then cancelling and betting when the odds are in your favour.
You have assumed that forex and wagering are the same. You are quite wrong for a number of reasons, including but not limited to, the following:
* participants in the forex market transact for many, many reasons aside from pure speculation, for example commercial hedging, international travel etc. Wagering is done for pure speculation;
* there is no definitive start and end point to a currency instrument. You have an infinite timescale, and an infinite ability to step in and out of the market at a time of your choosing;
* currency transactions are made OTC, over the counter, meaning its between individual participants ... not through a single exchange like a totalisator in wagering. This means if you want to "manipulate" the AUDUSD, you need to deal with every counterparty one-on-one - it's worthwhile noting at this point that the trader (liquidity provider) on the other end of Soros' phone line is **probably** not a dumb guy either, he is doing it for his own good reasons;
* the currency market is extremely liquid - an estimate $4 trillion is transacted every 24 hours (meaning you are not betting into small pool). This means you need a few trillion to corner the market, and no one can do that alone.
Even if you said a whole gang of hedge funds have worked together to influence the AUDUSD, does it make the currency exchange system broken? Again, no. The AUDUSD is a floating exchange influenced by a range if macroeconomic drivers, and macro speculators like Soros identify mispricings and act as a catalyst to bring the market to where it should be, sometimes with dramatic results.
I'm on holidays in Samoa and I'm not about to run a history seminar on Reddit, but you can read up on what he did with the Bank of England.
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