Last updated: 11th December, 2020
Understanding real-time, mid-market exchange rates
Every minute of every day, banks, institutions and individuals are involved in exchanging money from one currency to another. How much they pay and receive is determined by the exchange rate – the amount of one currency that another currency can buy. It’s therefore crucial to check which exchange rate is applied to your transaction, and whether the rate is in your interest.
You might have heard international money transfer providers boast that they offer the “real-time rate” or “mid-market rate” and that it’s the most beneficial rate one can get. But what exactly do they mean? This article explains how real-time and mid-market exchange rates work.
What is the mid-market exchange rate?
The mid-market exchange rate is defined as the midpoint between the “buying rate” (also called “bid rate”, see definition below) and the selling rate (or “ask price”, see definition below) of two currencies. Let’s imagine a transaction between two banks involving two currencies. This transaction will create a bid price (from the “buyer”) and an ask price (from the ‘seller”) for the currency pair involved in the transaction. The mid-market rate for this currency pair will therefore be the midpoint between the current bid/ask spread for this pair. Why use the mid-market rate as a reference? Because it is a sure way for people and companies that deal with foreign currency exchange to have an idea of where the value of any currency pair is trading, while at the same time benefiting both parties by not crossing the entire spread to execute their transaction. Moreover, a genuinely applied mid-market rate is generally regarded a transparent and accurate exchange rate.
Buying rate definition
Much like the name suggests, the buy rate of a currency is the rate at which a foreign exchange institution or individual is willing to buy a currency for. This is also known as the bid rate as institutions and individuals bid on a currency with the amount they are willing to pay for it. Buy rates essentially refer to how much of one country’s currency it takes to buy the currency of another.
Selling rate definition
Similarly, the selling rate of a currency is the amount that a foreign exchange institution or individual is selling a currency for. It is also referred to as the ask price, as they are asking others to pay a certain price, or bid close to that price, for the currency they are selling.
As an example, let’s look at a hypothetical scenario for buying and selling US Dollars (USD) to British Pounds (GBP).
What is the USD selling rate?
If we assume the current sell or ask rate of the US Dollar (USD) to the Pound (GBP) is 1.2394, then this means that a trader will sell USD for $1.2394 for every £1 spent by the buyer.
What is the USD buying rate?
If we assume the current buy or bid rate of GBP/USD is 1.2292, then this means that traders are willing to buy $1.2292 for £1.
What is the US mid-market rate?
When taking the above buy and sell rates into consideration, the mid-market rate for GBP/USD would be approximately 1.2343.
What is the real-time exchange rate?
The real-time rate (or live rate) is the latest available exchange rate between two currencies based on real-time changes in the market. Due to their very nature, real-time exchange rates fluctuate all the time. In order to know what they are at a given moment in time for a given foreign currencies pair, the easiest solution is to track them online through public sources. The rate you see when using sources such as Google, Bloomberg and Reuters to search for an exchange rate between two currencies is the real-time, mid-market exchange rate – which may have delays.
Who uses the mid-market rate?
Mid-market rates are predominantly used between banks, building societies, FX traders and financial institutions when they trade money amongst themselves. Instead of using their own exchange rate or making huge benefits at the expense of their customers, some international money transfer services, such as PagoFX, offer them the real-time, mid-market rate in a transparent way – with no mark-up on foreign exchange.
What do I have to watch out if an international money transfer provider says it’s using the real-time, mid-market exchange rate? You simply have to check what they mean by “real time, mid-market exchange rate” and whether it really reflects the definitions above. Keep in mind that some money transfer providers mark up the rate to make some extra money without being totally transparent. This is why it’s crucial for you to make sure that you’re getting a fair and transparent exchange rate, rather than an inflated or marked up rate. Moreover, the exchange rate must be the most up to date available at the time your transfer is sent.
Disclaimer: This article is provided as general information purposes only, and is not intended to cover all aspects of the topic. We recommend that you take professional and specialised advice before taking, or refraining from, any action based on the content of this publication, as this article is not intended to constitute expert advice. We do not guarantee, explicitly or implicitly, that the content of this article is accurate, complete or up-to-date. The information in this article does not constitute legal, tax or other professional advice from PagoFX or its affiliates.