Where prices start: the wholesale market
Currency prices originate in the wholesale or interbank market, where large banks, non-bank market makers and institutional investors trade with each other. There is no single exchange. Prices are formed across many electronic venues and direct relationships, and the rate for a major pair at any moment is the result of millions of quotes and trades flowing through that network.
Prices in this market are quoted for large amounts, often several million units of the base currency, and the participants trade on credit lines with each other. A business converting a few hundred thousand euros does not have direct access to these prices. It reaches the market through an intermediary: a bank, a broker or a money services business. That intermediary sources liquidity from the wholesale market and quotes a price to the client.
The wholesale price is the raw material. Everything you are quoted as a client is built on top of it, and every comparison you make between providers should start by asking how far the quoted rate sits from it.
Bid, offer and the spread
Every FX price has two sides. The bid is the rate at which a dealer will buy the base currency from you. The offer, also called the ask, is the rate at which the dealer will sell the base currency to you. The offer is always higher than the bid. The difference between them is the spread.
Take a hypothetical EUR/USD price of 1.0998 / 1.1002. If you want to sell euros, you receive 1.0998 dollars for each euro. If you want to buy euros, you pay 1.1002 dollars for each one. The midpoint, 1.1000, is the mid-market rate. Neither side trades there.
Spreads are measured in pips. For most pairs a pip is the fourth decimal place, 0.0001. For pairs involving the Japanese yen it is the second decimal place. In the example above the spread is four pips. In the wholesale market, spreads on the most traded pairs are a fraction of that during busy hours, and they widen when liquidity is thin.
Spread versus margin
People use spread and margin as if they mean the same thing. It helps to separate them.
The market spread is the gap between bid and offer in the wholesale market. Your provider does not control it. It reflects how actively the pair is traded and how nervous the market is.
The margin, sometimes called the markup, is what your provider adds to its own cost of the currency. If the provider can buy euros at 1.1002 and quotes you 1.1035, the 33 pips in between are its margin. This is the provider's revenue on the trade, and it covers compliance, banking, technology, payment costs and staff.
From the client's side, the useful figure is the distance between your rate and the mid-market rate at the moment you booked. That distance includes half the market spread plus the provider's margin. It is your true cost of conversion, and it can be expressed in pips, as a percentage of the amount, or in basis points, where one basis point is one hundredth of one per cent.
What drives the price you pay
Several factors push your cost up or down, and most are outside anyone's control on the day.
- Currency pair. EUR/USD, USD/JPY and GBP/USD are the most traded pairs and carry the narrowest wholesale spreads. Pairs involving smaller currencies cost more to source.
- Cross rates. A pair that is priced through a third currency, such as GBP/PLN priced through the euro, carries the spread of both legs.
- Ticket size. Small trades cost more per unit to process because fixed costs are spread over less money. Very large trades may move the wholesale price as they are filled.
- Time of day. Liquidity is deepest when the main centres for both currencies are open. Converting Polish zloty in the middle of the Asian night costs more than doing it during the European morning.
- Market conditions. Around major data releases, central bank decisions or political shocks, spreads widen across the market.
- Value date. Same-day value carries more operational risk and is priced accordingly.
- Relationship and volume. A client with regular, predictable flows usually costs less to serve than one with occasional, unpredictable trades.
Fees on top of the rate
The rate is only part of the cost. Payment fees sit alongside it, and some arrive only after the money has moved.
The first is the provider's own payment fee, if any, for sending a wire. The second is intermediary bank charges. International wires can pass through one or more correspondent banks, and each may deduct a fee from the amount in transit. The third is the receiving bank's charge for crediting an incoming payment.
Who pays these charges depends on the charge code chosen when the payment is sent. With OUR, the sender pays all charges and the beneficiary should receive the full amount. With SHA, charges are shared: the sender pays its own bank and the beneficiary bears the rest. With BEN, the beneficiary pays everything, and the amount received is reduced accordingly. If your supplier needs to receive an exact invoice amount, the charge code matters as much as the exchange rate.
Calculating the all-in cost
The all-in cost of a conversion and payment is the difference between what the trade would have cost at the mid-market rate and what it actually cost you, including every fee. The calculation is straightforward once you have the inputs.
- Record the mid-market rate at the moment you booked, from a source with a timestamp.
- Multiply the amount by the mid-market rate to get the reference cost.
- Multiply the amount by your dealt rate to get the actual conversion cost.
- Add every fee charged by the provider, plus any deductions your beneficiary reports.
- Subtract the reference cost from the total. Divide the result by the reference cost to express it as a percentage.
Doing this for every trade for a quarter gives you a realistic picture of what you pay, which is far more useful than a headline rate on a single day.
How to compare quotes fairly
Most quote comparisons are flawed before they begin, because the quotes were not taken on the same terms. To compare like with like, hold every variable constant except the provider.
- Same moment. Rates move every second. Two quotes taken ten minutes apart can differ because the market moved. Request them as close together as you can, and record the time.
- Same amount and same fixed side. Buying EUR 250,000 is a different request from selling USD 275,000.
- Same value date. A same-day quote and a spot quote are not comparable.
- Same delivery. Include the payment out, with the same charge code, if you need the beneficiary to receive a set amount.
- Same benchmark. Measure both against one mid-market source at the time of the quotes.
Be wary of comparisons based on a rate shown on a website or in an app, without a timestamp or an amount. Indicative rates are useful for orientation, but they are not dealable prices.
A worked comparison
The following is an illustrative example with three hypothetical providers and invented rates. It describes no real firm or price.
A company needs to buy EUR 250,000 against US dollars for spot value, paid to a supplier with the OUR charge code so the full amount arrives. At the moment the quotes are taken, the mid-market EUR/USD rate is 1.1000, so the reference cost is USD 275,000.
| Provider | Rate | Conversion cost (USD) | Fees (USD) | Total (USD) | Above mid |
|---|---|---|---|---|---|
| A, "no fees" | 1.1066 | 276,650 | 0 | 276,650 | 1,650 (0.60%) |
| B | 1.1044 | 276,100 | 25 | 276,125 | 1,125 (0.41%) |
| C | 1.1050 | 276,250 | 0 | 276,250 | 1,250 (0.45%) |
Provider A advertises no fees, but its rate carries the widest margin, so it is the most expensive. Provider B charges a visible fee and still comes out cheapest. Provider C sits between them. Now suppose Provider C sent the payment on SHA by default, and an intermediary bank deducted EUR 20 from the amount in transit. The supplier would receive EUR 249,980 and the company would have to send the balance, with another wire fee, to clear the invoice. On paper C beat A comfortably. In practice the shortfall and the second payment eat into that advantage, and they cost staff time as well.
The lesson is simple. Compare total cost against the same benchmark, on the same terms, and include what the beneficiary actually receives.
Warning signs in pricing
A few patterns should prompt closer questions. A provider that cannot tell you, after the fact, what the mid-market rate was when you booked is making benchmarking harder than it needs to be. A rate that is consistently better on small test trades than on your real volumes suggests the test was not representative. Charges that appear on statements without having been quoted beforehand are a sign that you have not been shown the full price.
Transparency does not require a provider to publish its margin. It does require that the rate you are quoted is the rate you get, that fees are disclosed before you commit, and that the confirmation matches both.
General information
This article is general information about how foreign exchange pricing works. It is not investment advice, and it does not recommend any provider or course of action. The figures above are hypothetical and do not describe CCYFX pricing or anyone else's.
CCYFX provides spot foreign exchange for businesses, with EUR as its base currency. See our Foreign exchange page or our FAQ for further background.
