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There's only one exchange rate (transferwise.com)
72 points by tomazstolfa on Oct 25, 2012 | hide | past | web | favorite | 47 comments

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 :)

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.

All I'm saying is that whoever is offering a service be honest upfront and say the fees they charge. I hate it with a passion when these guys hide their fees in multiple places and layers.

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.

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.

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.

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.

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 $.

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.

The cash market spread is usually something like 4-6 basis points for major pairs (i.e. 0.04%), even accounting for the fictitious mid rate, you still have orders of magnitude difference from the retail spreads. Thomas Cook, a major UK travel agent, is currently offering around 6% for GBPUSD going by their web site.

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.

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

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.

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

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.

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

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.

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...

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.

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!

Funny how my bank beats XE for EUR->GBP (and yes, it's close, but XE loses - found out that after signing up for XE )

I'll look into TransferWise as well

I was furious at the spread like many, but then understood the problem (not that I'm happier) still, a lot of money is spent on wire fees as well.

XEtrade is even worse than the banks. The banks will pretend that there's no fee, but at least they will generally tell you the spread you'll be charged as long as you specifically ask for the spread.

XEtrade charges you a different spread for every transaction, and doesn't list it explicitly in their quote. You never know in advance what it's going to be. They're virtually always better than the bank rate, but you don't know that in advance.

If I can ever get my bank to offer me their commercial rate for currency trades I'll switch from XEtrade in a heartbeat.

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?

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.

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.

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).

You can get some cards with no fees. Not sure what their spreads are though.

From the "guide" that came with a new "Premier" Lloyds Visa Debit card a few days ago: They charge 2.99% on all FX transactions and a further 1.5%, min £2, max £4.50 cash fee.

FWIW my Australian credit card with Westpac charges foreign exchange fees, about 2.5% if I remember correctly. It's only recently that they've added those fees as separate line entries in the account.

> 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?

Ha, I've thought the exact same thing. Sitting in KVB Kunlun Sydney a couple days before going to Japan, buying a few thousand dollars worth of yen, and watching recently arrived Japanese with bundles of yen buying dollars. I wanted to stand up and say, hey, anyone wanna buy some dollars at the market rate, I'll even round up to your smallest note?

Doubt there's all that much money in it though, and people would naturally be wary of meeting strangers while clutching bundles of cash. It wouldn't surprise me if once you did all the sums, in order to make any kind of money you'd have to charge the same as the rip-off exchange offices.

That's the idea behind currencyfair.com. The user experience is a little clunky but the rates are much better than anywhere else I've found (I send more than $2k a month to the UK so I've shopped around a lot).

When I worked at a bank, they would say "A margin you can drive a truck through" about this kind of thing. :)

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.

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.

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... * https://www.westpac.co.nz/international-migrant/foreign-exch...

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

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.)

> 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?

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.

Sometimes there are non-obvious ways that banks can make profits. For example, a bank can offer a free checking account by paying for the costs with interest on the balance. The mechanism for that is easy to understand, but your average layman would not think of it on their own. So I don't think it's unreasonable for a layman to trust a bank when they say "no fees", and assume that the bank has some clever way of profiting off of the transaction without hurting them. It's a wrong assumption, but it's not unreasonable.

In this day and age, we should be forcing banks not to flat out lie to customers. Spreads are another thing they seem to be able to shamelessly lie about without any apparent fear of punishment.

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).

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

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

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.

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).

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.

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