By Patrick Graham and Clare Hutchison
LONDON (Reuters) - A void is appearing in the upper reaches of the world's biggest and most powerful financial market as banks struggle to replace currency traders suspended or fired during a global investigation into allegations of foreign exchange rate-rigging.
Recruitment firms and sources at some of the banks at the center of the probe say there is huge reluctance to hire externally because replacements could be tainted by allegations of collusion themselves.
That leaves managers with the choice of promoting more junior staff into powerful chief and senior dealer positions or appointing staff from other units of the bank who are less familiar with the daily workings of the $5.3-trillion-a-day forex market.
While the hiatus may be temporary as the investigation unfolds, it comes at a time when machine-driven algorithmic models have already replaced around two thirds of the spot FX dealers operating in London a decade ago, and there are growing concerns about staffing numbers in the industry.
The financial impact for the banks remains unclear, but it adds pressure on a major source of income that is already suffering from a wave of regulations clamping down on the amount of risk dealers can take.
With prospective bans on proprietary trading spelling a change in how lenders do business, the fallout from the scandal further clouds the outlook for many department managers.
"Certainly it might only be 20 people so far who have been suspended, but it has created one hell of a cloud above the industry," said one well-known headhunter in London, who also declined to be named.
"We have had calls from people who haven't been in the market for a while who think there might be opportunities for them. But I think it's very difficult. Until more decisions are made, there is going to be a little bit of a stand-off."
Regulatory authorities are looking at whether traders at some of the world's biggest banks colluded to manipulate benchmark foreign-exchange rates used to set the value of trillions of dollars of investments.
Banks have taken action against 21 traders, and financial institutions including Royal Bank of Scotland <RBS.L>, Deutsche Bank <DBKGn.DE> and UBS <UBSN.VX> are now said to be reviewing the rules governing how traders make bets with their own money.
All of the banks who have taken action against traders since the start of the probe declined to comment or had no immediate comment on the resulting recruitment and operational issues.
Among other things, industry players say investigators will have to trawl through millions of chatroom conversations and other correspondence for dozens of traders, potentially including some who have since moved on to other jobs.
The head of Britain's FCA financial sector overseer has said its probe is likely to drag on into next year, leaving the banks nervous about hiring anyone with a history of trading at a major institution.
"This is not any sort of downsizing, so all these people will need to be replaced," said a senior manager in foreign exchange at one bank in London, who asked not to be named.
"But banks will need to be extra careful when they look at candidates' history, whether it is internally or externally. Certainly if you are a bank and you want to hire a high flier from another bank, you have to think twice."
The headhunter said banks' other practical problem for the moment is that most of the disciplinary action so far has been in the form of suspensions rather than outright dismissals.
"If you are a big bank who has someone suspended at this time, until a definitive decision is made it's very difficult to go out and hire people purely to fill in a space for someone who is only suspended," he said.
"We can all hazard a guess as to what is going to happen to anyone who is suspended, but we don't know."
A handful of top banks control the multi-trillion-dollar market tied to the benchmark exchange rates. The top five FX dealing banks see around half of the forex market's average daily flow, and the top 10 banks account for almost 80 percent.
London-based recruiters say the spot FX market in major currencies in the city adds up to around 125-150 dealers at 25 banks - as little as a third of its size a decade ago.
"Electronic solutions are coming in and doing the job that people used to do. The banks also are not taking the same amount of risk, so there is less of a requirement for people, and increasingly it's a different skill set," the headhunter said.
"Banks more and more are just offering an execution service to clients. The rules on (limiting or banning) proprietary risk-taking are making the banks into a different model now which can require a different kind of trader."
A separate investigation last year into rate rigging in another major center, Singapore, found 133 traders tried to manipulate lending and foreign exchange reference rates, many of whom banks have struggled to replace.
Adriana Swift, Head of Capital Market Sales and Trading at financial recruitment firm Selby Jennings, said those involved would find it hard to move into other parts of the business and will often be forced to change career, unless they are at a junior level and formally cleared of any wrongdoing.
"People generally don't want to hire FX dealers for sales and trading roles in other asset classes because they want people with experience in the sector they're hiring into," she said.
(Additional reporting by Jamie McGeever in London and Rachel Armstrong in Singapore; editing by Julien Toyer and Will Waterman)