

There's only one exchange rate - tomazstolfa
http://transferwise.com/blog/2012-10/one-real-exchange-rate

======
ig1
No. Saying there's one exchange rate is a fiction.

I used to lead the development for currency pricing algorithms for a major
market-making investment bank.

Think about the way the market works fundamentally. You have people who want
to sell at rate X and people who want to buy at rate Y. These form the basis
of the bid/ask pricing, if the values cross then the people involved can do a
trade.

A retail currency exchange broker will add their spread on-top of the market
bid-ask spread, but that doesn't alter the fact that there is a fundamental
underlying spread caused by differing views among the buyers and sellers of
the currency.

There's also not a single market which can have a mid-price. Currencies aren't
like stocks where there's a single point where the trades happen. There are
lots of currency markets and at any one point in time they'll have different
fundamental bid/ask spreads (because of latency), you'll also have differences
based upon volume and market depth, who's willing to trade with you, and the
participants in that market (many bigger trades now happen in private dark
pools).

So once you've picked what your definition of market is then you need to pick
your definition of midpoint. Are you going to take the middle of the bid-ask,
are you going to take the price the last actual trade was done at, or a
volume-weighted average price, are you going to filter out momentary spikes,
are you going to filter out prices from people who are purposefully market
manipulating, etc. What about when there's low liquidity and price might be
wildly off ?

And that's all stuff that's required to just arrive at a market price. You
have to take a subjective view on every-one of these decisions, so in practice
any serious market participant is going to have a slightly different view of
what the market is for any currency.

On the point of offering a fixed single exchange rate, yes it's possible, but
the the broker offering it (1) has to make their profit from somewhere other
than the spread and (2) take the risk that if the market moves against them
that they'll lose money (and again the cost of this has to be covered
elsewhere).

(2) is actually a huge risk. If the market moves so your price is outside of
the market bid-ask range then someone can arbitrage you and make risk free
profit from your out of market price and basically bankrupt you. So to defend
against this you either need to be able to stop transactions if this ever
happens of put enough of a delay in your system so you can make sure this
never happens.

------
TomGullen
I feel this blog post would be better if you just described what a spread is
in a less roundabout way - but it's still very important people know about
spreads (and I'm a bit jealous because I've been planning a similar blog post
for a while!)

I feel like "No exchange fees" is trickey. I ask my friends where they think
is cheapest to swap money, they all base it on the fees. "Best go to xxx
because it's commission free". Currency exchange services blatantly are aware
of this and are exploiting it pretty hard. I'm no expert, but that sounds like
good starting conditions where different exchange services can charge a lot
and don't really need to worry about competing with each other. I'm pretty
sure average consumer ignorance and unwillingness to shop around beyond how
much various services charge in commission is costing everyone dearly.

Spreads aren't limited to just banks either. Paypal used to be one of the
worst offenders from what I recall, offering horrific profiteering spreads. To
be fair to them though, nowadays they have improved.

Interestingly, Stripe advertises as "No hidden fees". I emailed them a while
back and asked if they pass on the spreads they get from the bank to the user
as I would consider it a hidden fee if they modified the spreads they were
provided - I was pleasantly surprised by their response saying they would also
consider it a hidden fee and offer the same spreads as they have access to. To
me this was huge, and a massive hallmark of a company that's doing it right
and treating their customers with respect.

Online poker also has been known to offer very expensive spreads when
converting between currencies. Some of them felt very unfair and left a sour
taste in your mouth - convert $100 to £80, then that £80 a second later back
to $USD you would lose several percent of the original amount.

One of the worst and most expensive things you can buy are travelers cheques.
Absolute rip off, I always avoid these. The security they offer you is the
only plausible upside to them, which is a pretty marginal upside in my
opinion. Post Office today is quoting £1 as $1.564, when the actual current
market rate is $1.61358. They make 5c profit on every £1 you convert. Every
£100 you convert, they chop of $5. That's only the first stage as well, if you
have any left over be prepared to be raped when you want to swap them back.

When I travelled around the USA, I researched the best way to spend my GBP out
there with the cheapest spreads as I was on a shoe string budget. Credit card
won hands down. When I walked in the bank to get the credit card, I asked them
if they offer market rate on the currency conversions. They said yes. When I
got back, they had charged more than market rate on every transaction (I was
expecting this). I complained and told them they lied to me, and got some free
money. It's a good travel tip if you harbour general resentment for banks,
that scenario will just keep re-enacting itself and is a cow you can keep
milking if you can be bothered.

Best way to exchange cash is to meet up with a traveller coming in the
opposite direction. Work out the market rate, swap the cash and be on your
merry way. Possible startup idea?

~~~
andrewjshults
If you're in the US (or can open a US bank account), I've always had good luck
with Charles Schwab's ATM card. They don't charge a foreign transaction fee
(which is where you really get killed with US credit cards - my Amex Blue has
a 2.7% - way more than any difference in spread) and they refund your ATM fees
(even foreign ones). Sometimes their system doesn't automatically catch the
ATM fees, but it's generally pretty good and I've always had a good experience
with customer support getting the missing ones refunded. While I haven't tried
to match up the mid-market rate for the exact moment I made the transaction,
it's always seemed to be close enough inline with what the range on that date
was that saving the $2-5 in ATM fees + no foreign transaction fee if I use it
as a Visa would have greatly made up any difference in the spread.

Do UK credit cards generally not charge foreign transaction fees? There are
still some in the US, but a lot are either higher end cards (Amex Platinum) or
geared specifically at travelers.

~~~
TomGullen
Here in the UK they charge on everything, IIRC when I went to USA they charged
something like £5 per withdrawl, then the amount you got would also have an
expensive spread. The £5 per withdrawl was irritating as it forced you to
withdraw $200+ a time, the more you took out the cheaper it would be overall.

~~~
barrkel
This is normally the typical US ATM fee which UK banks don't bother to try and
return to you, AIUI. The credit card spread by itself isn't _that_ bad; it's
better than almost all alternatives except for pre-pay currency cards (not as
secure or convenient as a credit card especially if you get saddled with a big
pre-auth somewhere) or shopping around for the cheapest cash conversion (in
which case you end up with a wad of high-value notes you can't spend if you're
not careful).

------
maggit
This domain is more complex that this Hinrikus guy makes it out to be. You can
not be expected to be able to trade at the mid-market price, and the market
for a volatile currency pair such as GBP/EUR easily moves several hundred
times per second at times. Additionally, the rates the bank gets quoted
depends on which exchange they are talking to, and the deal the bank has with
them. The assertion that "there’s only one interbank rate at any point in
time" is flat out false. Exactly which price does Hinrikus want his bank to
quote him?

In fact, the bank offers a service where it takes small positions such as 1000
GBP and gives EUR in return. This is the deal. This small transaction does not
necessarily change the bank's plans for foreign exchange.

How does the bank set the price ("rate")? To some competitive value where they
expect to make a profit or not lose too much, depending on the competition.
The assertion that they do not profit from it might very well be true, even
though it probably shouldn't be.

Compare, if you will, to gas stations. The current price for petrol is
dependent on what it currently costs on the world wide markets, but also
dependent on the demand in the specific area, for example. It is complex, is
all I'm saying :)

~~~
Dylan16807
You have to slowly ship petrol; that puts a severe damper on the market
reacting to supply and demand. Imagine how different it would be if a gas
station could instantly buy out the stock of a competitor across town charging
three cents less.

Anyway I fully understand the bank being slightly off the middle, but with
that big of a spread the bank is either lying or has money bonfires somewhere
in back. And I'm not really joking there, look at how much is spent on
horrible legacy systems out of fear that replacements will have bugs... or at
least _different_ bugs.

------
PeterisP
Well, they are not charging a fee - they are offering a price. If you go and
buy a pound of oranges, then usually also no fee is being charged, but that
doesn't and shouldn't mean that they are selling the oranges for the same
price as wholesale.

And nobody (including you, Floyds or Jesus) can get mid-market rate for an
immediate exchange of $1000:

1) The rate that you can get for a deal right now is different than the rate
of the deal you made a minute ago - since the market is moving, but the mid-
market rate is based on previous deals; so depending on rise/fall you might
not get anyone to accept your deal at that price;

2) You can get market rates for market-sized deals, and that is measured in
round millions; if you want to buy 1000 EUR, then that rightly deserves a
markup of wholesale/retail;

3) In the common forex market, you don't get your funds immediately; spot
deals are usually settled within 2 business days. If you want immediate money
- then that is a different product with a different price.

~~~
mvc
Aren't "market-sized" deals measured in millions because banks are making one
deal to cover lots of smaller deals that they've made with their own
customers?

If someone can cut out the middle-man and let the small deals trade with each
other directly, there is no reason why people can't get the mid-market rate
for a trade of $100 never-mind $1000.

This is the idea behind currencyfair.

------
JumpCrisscross
Nobody can transact at the mid-market rate (average of the best bid and best
offer). It is a theoretical metric derived from the order book (or at least
the portion of the global order book visible to you at the time of calculation
- unlike stocks there is no requirement for quotes to be made publicly
available). Yes, your bank is making a spread off you but no, not receiving
the mid-market rate is not evidence of being screwed.

~~~
vitobcn
I wouldn't agree. Obviously, there needs to be a spread, but receiving a 1.23
rate when it should be around 1.29 is getting screwed. That's higher than 5%
when there is no reason for it to be.

Banks can set a fixed daily rate or a yearly one, it is their arbitrary
decision. And obviously, they set it this way because it gives them a nice
profit and they can get away with it.

Living abroad, I have transferred money in many occasions, and any FX broker
will set their exchange rate on the spot or at most up to a minute basis. In
this case, it would mean having a spread such as 1.288-1.292 (and probably
tighter) instead of the one quoted by the traditional bank.

I was outraged when I discovered the FX GlobalTransfer service offered by
Oanda and learnt that my bank had been overcharging hundreds of $.

~~~
bemmu
Any tips on how I could be saving in this situation?

My service Candy Japan gets most of its money via PayPal in USD. I have to
convert this to EUR to get it to my Finnish bank account. Then from the
Finnish bank account I need to transfer it to my Japanese bank account to
actually be able to buy the product and pay for shipping here. Neither accepts
PayPal or debit card directly.

I created my PayPal account when I was still living in Finland, so it doesn't
offer me the option to withdraw directly to Japan.

------
mseebach
It a bit disingenuous.

First, no, there isn't "only one exchange rate", there's whatever you can buy
or sell your currency for at a given point in time. As with so many other
things in life, in banking or others, a regular person can't get access to the
same prices as a professional who trades in bulk.

Second, _erhm_ Floyds (<http://www.lloydstsb.com/travel_main_page.asp>)
doesn't claim that they're not making a profit, they claim that they're not
charging a commission. Which they don't. The fact that you can prime a low-end
customer support person to say "profit" instead of "commission" doesn't change
that fact.

Which boils down to: Pay attention to the spread you're getting. Like most
other services provided by retail banks, you're probably not getting the best
deal out there.

~~~
mikeash
What's the difference between a commission and a profit made from bumping up
(or down) the exchange rate they give you?

------
aneth4
Money is a commodity. Commodities in efficient markets have buy and sell
orders, and spreads between them. Spreads allow market-makers to make a small
profit and protect them from the risk of holding the currency.

While the site looks nice, the views expressed are so naive (and riddled with
misspellings,) I'd recommend avoiding any major transactions with these
people.

------
cmer
I've been using Norbert's Gambit for a few years to avoid these hidden fees
and I saved thousands. It's extremely easy to perform as well. Anybody
converting money should look into it.

More information here: <http://www.finiki.org/index.php?title=Norberts_Gambit>

~~~
mseebach
Your link doesn't work, this one does:
<http://www.finiki.org/wiki/Norberts_Gambit>

This might well be what someone like Travelwise is doing on the backend,
especially if they have the volume to offset the commissions.

~~~
minimax
The HN markdown parser is stripping the apostrophe in both of your links. Try
this: <http://www.finiki.org/wiki/Norbert%27s_Gambit>

------
rolux
I don't get the point that the article is trying to make. Of course banks
won't trade at mid-market price. Of course there will be a buy/sell spread.

Take a look at exchange rates for more exotic currencies than British Pound
vs. Euro. The buy/sell spread can be _huge_ , and often reflects actual risks
in keeping around large amounts of cash in volatile currencies.

------
narcissus
I normally transfer my money via XE trade: to be honest, I take their word for
it that they are giving me a current rate with no fees, but I do know that the
rate they offer me is only ever valid for something like 20 seconds...

~~~
paulgb
XE is upfront about the fact that they have a spread, that's how they make
their profit. Compared to banks XE takes a lower spread, though.

    
    
      TransferWise quote: 1000 GBP -> 1236.93 EUR
      XE quote: 1000 GBP -> 1223.99 EUR
    
      Wells Fargo rate: 1000 USD -> 952.56 CAD
      XE quote: 1000 USD -> 977.42 CAD
    

So XE beats the bank, but TransferWise (which only offers GBP<>EUR) beats XE.

~~~
narcissus
Cool. Unfortunately I need AUD and CAD, so I'm out of luck :)

I knew that XE made money on a spread of sorts, but I thought that it was more
related to the fact that between the time they offer me a rate and the time it
takes to do the transfers, they've been able to work the fluctuations to their
advantage.

I guess I see it as different to the 'the rate we offer you is not the actual
rate' type spread. I mean, it's different in that they offer me a 'spread-less
rate' but they end up with the spread due to the time it takes to make the
transactions.

Assuming I'm correct about my understanding of how XE makes money (and please
correct me if I'm not) then out of curiosity, are both of these processes
equally considered to be a spread, or is one a more 'traditional' example than
the other? Hopefully that question makes sense!

------
TransferWise
Thanks everyone for your opinions, comments and disagreements - pleased to see
that we've sparked a debate.

If currency transfers can be facilitated in a way that circumvents the markets
and requires no actual trading of currency, then many of these concerns and
processes voiced above become irrelevant.

Of course there is huge complexity behind the formation of the mid-market
rate, and yes, perhaps we were being ever so slightly facetious in our post!

The point we really want to get across is about improving transparency for end
users, and how difficult it is to get a straight answer from a bank's
customer-facing staff.

We speak to consumers and businesses every day who have no interest in what
happens behind the scenes. All most of them know is that at any one point in
time there is an 'official exchange rate' of sorts, but they never see that
rate when they actually come to make a transfer or exchange.

As a result it's difficult to work out which provider is really the most cost-
effective for their money transfers, and how much they're really paying. This
is what we think is broken, and it's great to see so many people also
passionate about it.

------
xyzzy123
It seriously pays to pay attention to the rates between banks.

I was doing a telegraphic transfer between my Australian bank account to my NZ
account, transferring AUD -> NZD.

I hit "go", and shortly after noted I was getting the rate 1.201. After
checking, I realised that if I just transferred AUD I would get 1.24 from my
NZ bank. This was like a $200 NZD difference. Fortunately I was able to
cancel, transfer AUD and convert on the other end.

Compare e.g. the following:

* [http://www.westpac.com.au/personal-banking/services/fx-calcu...](http://www.westpac.com.au/personal-banking/services/fx-calculator-rates/) * [https://www.westpac.co.nz/international-migrant/foreign-exch...](https://www.westpac.co.nz/international-migrant/foreign-exchange-and-international/currency-converter/)

Today, the difference between Westpac Australia and Westpac NZ is 1.21 versus
1.24 for telegraphic transfers...

------
xntrk
There is never one exchange rate. The mid market price of a currency pair is
just an average of the bid and offer prices. The bid price being what trader
are willing to buy at and the offer price is what people are willing to sell
at. The bid and the offer price should never be the same. If they were the
same a trade should have happened.

So if the mid market for EUR/USD is 1.2993 the prices could be something like
bid 1.2990 / offer 1.2996. So when you walk into a bank (if they are giving
you the real bid offer) and try and convert USD to EUR you are selling so you
will get 1.2990 USD per 1 EUR. And if you were trying to convert EUR to USD
you would pay 1.2996 USD for each EUR.

There are also many othe factors that will increase costs in these
transactions. Banks charge fees to other banks for each trade and they will
also show different spreads to different banks based on credit risk and/or
volume.

------
pif
> Floyds: None. We don’t take a fee at all.

Who could believe this? Clearly the bank is going to make a profit. Actually,
it _has_ to make a profit; otherwise, how could it offer me its services?

~~~
narcissus
I'm not arguing that they're _obviously_ not making a profit, but saying that
it _has_ to make a profit is not necessarily true. I mean, overall they must,
but they don't have to make a profit on each individual service that they
offer.

------
B-Con
Semi-relevant tidbit about exchange rates: Converting from currency X to Y, Y
to Z, and Z to X does not always yield the same ending amount as in the
beginning. The practice of arbitrage
(<http://en.wikipedia.org/wiki/Arbitrage>) involves looking for imbalances in
conversion rates and converting money between currencies to end with more than
you started with. (Disclaimer: It's hard to do, potentially risky, and the
margins are usually very low.)

------
damian2000
I thought it was common knowledge among anyone who has travelled that the
exchange rate is where the bank/money changer makes their profit. Banks are
certainly the worst offenders when it comes to fiddling the exchange rate. In
most of Asia, street money changers dominate the market over banks for small
amounts (<US$10,000).

------
mikkom
That's just plain incorrect, there is _no_ one centralized exchange in fx so
there actually is no one exchange rate.

Because of latency arbitrage, the rates on different marketplaces tend to be
very close but there is no one correct exchange rate (or spread).

------
bnastic
Why is this even on HN? People here are smart enough to known what spreading
is and what it does.

~~~
CKKim
I think it's been posted to promote the startup.

~~~
tomazstolfa
Hm, not exactly.

I've posted this because the post provides an insight into a non-transparent
way of pricing and I thought it might be an interesting conversation starter
on HN.

All these comments seem to show the topic is interesting enough.

------
nakodari
Your bank lied to you. I knew a person who worked in a bank (we became
friends) and he flat out told me not to rely on banks to exchange currencies
because their exchange rate is always lower than market rate. Obviously, the
banks take profit.

This is one reason why I have both local currency and foreign currency (USD)
accounts with the bank. Instead of the bank converting the money to local
currency, I withdraw the money from foreign currency account, get it converted
at a local exchange shop (after getting a better rate) and deposit the money
back in my local currency account.

It takes time but it's worth it when converting a large amount of money.

