There's only one exchange rate

No. Saying there's one exchange rate is a fiction.<p>I used to lead the development for currency pricing algorithms for a major market-making investment bank.<p>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.<p>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.<p>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).<p>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 ?<p>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.<p>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).<p>(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.

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!)<p>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.<p>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.<p>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.<p>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.<p>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.<p>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.<p>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?

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?<p>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.<p>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.<p>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 :)

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

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.

It a bit disingenuous.<p>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.<p>Second, <i>erhm</i> Floyds (<a href="http://www.lloydstsb.com/travel_main_page.asp" rel="nofollow">http://www.lloydstsb.com/travel_main_page.asp</a>) 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.<p>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.

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.<p>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.<p>More information here: <a href="http://www.finiki.org/index.php?title=Norberts_Gambit" rel="nofollow">http://www.finiki.org/index.php?title=Norberts_Gambit</a>

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.<p>Take a look at exchange rates for more exotic currencies than British Pound vs. Euro. The buy/sell spread can be <i>huge</i>, 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...

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

It seriously pays to pay attention to the rates between banks.<p>I was doing a telegraphic transfer between my Australian bank account to my NZ account, transferring AUD -&#62; NZD.<p>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.<p>Compare e.g. the following:<p>* <a href="http://www.westpac.com.au/personal-banking/services/fx-calculator-rates/" rel="nofollow">http://www.westpac.com.au/personal-banking/services/fx-calcu...</a> * <a href="https://www.westpac.co.nz/international-migrant/foreign-exchange-and-international/currency-converter/" rel="nofollow">https://www.westpac.co.nz/international-migrant/foreign-exch...</a><p>Today, the difference between Westpac Australia and Westpac NZ is 1.21 versus 1.24 for telegraphic transfers...

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.<p>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.<p>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.

&#62; Floyds: None. We don’t take a fee at all.<p>Who could believe this? Clearly the bank is going to make a profit. Actually, it <i>has</i> to make a profit; otherwise, how could it offer me its services?

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 (<a href="http://en.wikipedia.org/wiki/Arbitrage" rel="nofollow">http://en.wikipedia.org/wiki/Arbitrage</a>) 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.)

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 (&#60;US$10,000).

That's just plain incorrect, there is <i>no</i> one centralized exchange in fx so there actually is no one exchange rate.<p>Because of latency arbitrage, the rates on different marketplaces tend to be very close but there is no one correct exchange rate (or spread).

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

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