
How does the wholesale foreign exchange market actually work? - trstnthms
https://getmondo.co.uk/blog/2016/01/08/how-does-the-wholesale-foreign-exchange-market-work/
======
iyn
From someone who has absolutely no idea how the markets work and what are the
'mechanics' behind the stock markets, economy etc: what is the good/productive
way to learn about such things? The linked article provides some explanation,
but I still don't feel that I 'feel'/truly understand the topic. I'd recommend
books/videos/articles recommendations.

~~~
whatok
This is a great overview done by Ray Dalio, founder of Bridgewater Associates;
one of the world's largest hedge funds.

"Created by Ray Dalio this simple but not simplistic and easy to follow 30
minute, animated video answers the question, "How does the economy really
work?" Based on Dalio's practical template for understanding the economy,
which he developed over the course of his career, the video breaks down
economic concepts like credit, deficits and interest rates, allowing viewers
to learn the basic driving forces behind the economy, how economic policies
work and why economic cycles occur."

[https://www.youtube.com/watch?v=PHe0bXAIuk0](https://www.youtube.com/watch?v=PHe0bXAIuk0)

------
blibble
I've been left wondering how the Mondo/Mastercard rate actually works: yes
they pick some rate based on X, Y and Z, but how does this interact with the
market described in the post?

I suspect not very much at all, at least for major currencies, as Mastercard
has people buying $ for £ in the UK, and £ for $ in the US, so they only need
to go onto the market for the imbalance, allowing an "incredibly good" rate,
when they're not exchanging much on the open market at all...

~~~
dingwallr
There doesn't seem to be much information publicly available regarding how
payment networks manage transactional FX risk exposure, but I did find this:

 _MasterCard enters into transactions in derivative financial instruments,
typically in the form of foreign currency forward contracts, to manage risk
associated with anticipated receipts and disbursements which are either
transacted in a non-functional currency or valued based on a currency other
than its functional currencies. MasterCard also enters into foreign currency
forward contracts to offset possible changes in value of assets and
liabilities denominated in foreign currencies due to foreign exchange rate
fluctuations. MasterCard does not engage in proprietary trading of
derivatives. Its objective for entering into transactions in derivative
financial instruments is to reduce exposure to transaction gains and losses
resulting from fluctuations of foreign currencies against its functional
currencies. MasterCard engages in derivatives transactions solely and
exclusively for the purpose of hedging foreign currency exchange risk incurred
in the operation of its business._

 _As noted above, MasterCard has approximately 20,000 customers, and processes
payment card transactions from more than 210 countries and territories.
MasterCard derives approximately 60% of its revenue from outside of the United
States. Given the global reach of our company, we are deeply impacted by
fluctuations in foreign currency exchange rates in the operation of our
business. MasterCard generates revenues and incurs expenses that are either
transacted in, or valued based on, currencies other than the U.S. Dollar. For
example, MasterCard charges its customers assessment fees for various services
it provides to its customers, including the use of the MasterCard brand
globally. These assessment fees are typically a percentage charge on a
customer 's total volume of transactions incurred on MasterCard-branded cards.
Because of MasterCard's global presence, transactions effected in foreign
currencies are converted into U.S. Dollars and the percentage charge (i.e.,
assessment fee) is calculated on this converted U.S. Dollar volume. Hence,
fluctuations in foreign exchange rates impact the amount of U.S. Dollar
assessment revenue MasterCard collects. Similarly, given our global footprint,
we make significant expenditures and incur significant contractual obligations
to make future expenditures in countries around the world for commercial
activities, such as marketing, advertising, payroll and operations. These
expenditures and obligations may be denominated in currencies other than the
U.S. Dollar. This exposes MasterCard to fluctuations in foreign exchange
rates. In addition to our transactional exposures, we also hedge balance sheet
assets and liabilities denominated in foreign currencies. From time to time,
MasterCard is also exposed to foreign exchange risks arising from overseas
acquisitions._

Source:
[https://www.fdic.gov/regulations/laws/federal/2011/11c89ad79...](https://www.fdic.gov/regulations/laws/federal/2011/11c89ad79.pdf)

------
dmix
> The software at the heart of an exchange that manages the Order Book is
> called a Matching Engine, and must be very fast and reliable.

Does anyone know what language these systems are typically built with? Or have
examples of their implementation?

~~~
pdovy
Typically C++, Java or C#, although the technology in the currencies trading
world has generally lagged behind say, US cash equities where exchanges are
catering more to electronic customers (a substantial portion of the currency
trading user base is still trading manually).

Reuters changed over to a more modern platform around 2013, but prior to that
for electronic trading they would basically designate a Windows host for you
that ran their GUI application plus a server, which you could connect to and
would just forward your requests via COM to the UI.

------
dsjoerg
This quote makes me question the rest of the article: "Historically,
currencies were always priced against US dollars."

Foreign exchange precedes the _existence_ of the US Dollar, so wtf.

~~~
dingwallr
Really it should say "Since the collapse of the Bretton Woods system".

[https://en.wikipedia.org/wiki/Bretton_Woods_system](https://en.wikipedia.org/wiki/Bretton_Woods_system)

------
bhouston
I can not imagine it is that good of a deal as I get calls about people
wanting to help me with my foreign exchange on a monthly basis for many years
now.

There is not topic that I get more cold calls on than this. This suggests to
me, this means it must be fairly profitable for those companies offering it,
and that profit likely would come out of my pockets, but I haven't done the
analysis.

That said, I know my bank has pretty shitty exchange rates:

[http://www.rbcroyalbank.com/cgi-bin/travel/currency-
converte...](http://www.rbcroyalbank.com/cgi-bin/travel/currency-converter.pl)

~~~
Symbiote
I transferred some savings last year, because I emigrated.

All the normal British banks offered very poor exchange rates. Traditional
money exchange sites, which seemed to target people making large foreign
purchases (houses etc) or people looking to invest in foreign currency were
better, but as soon as I signed up on the website I received calls from their
staff, which annoyed me.

In any case, the rates were still beaten by
[http://www.TransferWise.com/](http://www.TransferWise.com/) (London startup).
Transfers with TransferWise aren't instant, they wait until there's a transfer
in the opposite direction. But I wanted a relatively obscure European
currency, and my transaction was only in the queue for about 45 minutes.

~~~
ant6n
I wish their "see how" section would explain how it actually worked (including
what the source and destinations can be), rather than just telling me it's
cheaper than the banks. The site seems to want me to sign up before even
giving any hint what's required; that's not an on-boarding experience that my
15seconds of curiosity will work with.

~~~
Symbiote
That's true. TransferWise ran a lot of poster advertisements in London, but I
think I realised how it worked from a competitor's advertisements —
[https://www.weswap.com/](https://www.weswap.com/) (slightly worse rates, and
works by using a card, but they have a better website).

TransferWise have a well-buried FAQ item:
[https://transferwise.com/support/customer/en/portal/articles...](https://transferwise.com/support/customer/en/portal/articles/1570199-member-
matching)

------
bluedino
Is private forex trading as lucrative as it seems? People online seem to be
making consistent, solid returns on relatively small investments (you can
start out with < $100k)

~~~
adwn
> _People online seem to be making consistent, solid returns on relatively
> small investments_

I seriously doubt that. Realistically, Forex trading is gambling [1], and
gamblers tend to be loud about their gains and silent about their losses.

[1] Note that this doesn't necessarily mean that it's random chance – Poker is
also gambling and depends partially on skill, not only luck.

~~~
greeneggs
Currencies do often seem to have long-term trends. Trading on them works well
until it doesn't. Since currencies move slowly, brokers can allow you to
borrow much more than your capital to leverage it. It really is gambling,
though, since it is zero-sum. At least with your money in stocks, you can hope
for a long-term upward trend to balance out short-term fluctuations.

Typical news stories:

1\. Amateur currency traders in Japan, making a fortune until they don't.

> Most of these accounts involve margin trading, in which investors place a
> cash deposit with a brokerage that allows them to borrow up to 20 or even
> 100 times their holdings for trading.

[http://www.nytimes.com/2007/09/16/business/worldbusiness/16h...](http://www.nytimes.com/2007/09/16/business/worldbusiness/16housewives.html)

2\. A similar story in Europe, when the Swiss dropped their currency peg

> Europe has no caps in place, in contrast to other jurisdictions, such as the
> US, Hong Kong and Singapore. Clients deposit money with trading venues and
> use this as collateral to borrow a much larger amount and magnify their
> trading positions. In London it is usually 100-200 times the amount
> deposited into a retail account, but can be upwards of 500 times.

[http://www.ft.com/cms/s/0/8676c6c6-9d97-11e4-8946-00144feabd...](http://www.ft.com/cms/s/0/8676c6c6-9d97-11e4-8946-00144feabdc0.html)

------
scrollaway
Since their blog is coming up, asking HN:

Mondo is looking like an interesting bank. I've had my eyes on both them and
Simple for a while; unfortunately, I'm not in the UK anymore nor in the US so
I went with Number 26 instead. Anyone have any experience with either?

~~~
germanier
I have been using Number26 as my main spending account for a few months now
but wouldn't use it as my main account. There are a few things that aren't
implemented yet, such as crediting cheques (I still get one or two a year) or
non-SEPA transfers (though to be fair it is very expensive at banks compared
to e.g. Transferwise so I wouldn't use it either way). The support is
overwhelmed at the moment and over Christmas they had technical diffuculties
that weren't fixed for around a week, presumbly because they had no staff on-
call to do so. Also their card doesn't have a Girocard function which makes it
unusable at some locations in Germany.

Unlike other banks they don't refund ATM charges. Also, according to internet
forum users those tend to be a bit higher compared to other MasterCard cards
for some reason. Additionally multiple users reported problems using at card
at some South-East Asian POS Locations. But having a backup card is never a
bad idea.

It's very convient that they immediatly deduct money from your account as soon
as the charge is authorized (which makes it easier to model in my mind as it
works just like real money) compared to traditional cards where it takes a few
days. However that also applies to holds (e.g. from hotels). I would advise
they have another card for such purposes.

Also, I wouldn't suggest keeping your money in a currency that you have no
connection with simply because of the forex risk.

You might also want to take a look at Revolut
[https://revolut.com](https://revolut.com) It's not a bank account but a very
useful card with very good exchange rates.

~~~
pjc50
Revolut: No fees _and_ perfect interbank rates? Where do they make their
money, then?

~~~
germanier
Presumably they get the interchange fee (1-2% in the US and capped to 0.2% in
the EU now). I suppose they operate at a loss at the moment but which business
we talk about on this site doesn't?

