How does the wholesale foreign exchange market actually work?

http://investopedia.com is a great way to dive in and learn some vocabulary. They also have some nice videos.

A blog post I keep around because I was tired of writing the same things on HFT threads:

http://kc.my-junk.info/hft-books/

Of particular note if you are interested in the mechanics of exchanges is "Trading And Exchanges" By Harris. It is a little old at this point (and thus doesn't deal with RegNMS which is of particular importance to HFT) but a very good book on the basics.

The Coursera course "Economics of Money and Banking" is fantastic, and focuses on real-world mechanics rather than theory. You should be able to view archived lectures if there isn't an active course: https://www.coursera.org/course/money

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

I haven't had time to watch yet, but Khan Academy has a lot of presentations here: https://www.khanacademy.org/economics-finance-domain/core-fi...

I highly recommend Trading & Exchanges, by Larry Harris. He walks through many kinds of transactions from end to end, with concrete examples, in plain language.

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...

Nasdaq's is written in Java. The London Stock Exchange's engine is written in C++, and the previous version was C#.

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.

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

https://en.wikipedia.org/wiki/Bretton_Woods_system

Yes, it would be more accurate to say that historically, currencies were priced against GBP, until the US Dollar took over that role when the US became the world's leading economy after WWII.

The article's mostly correct. Some assertions and definitions aren't quite right, as if the author doesn't have direct experience but is instead regurgitating their own research/reading.

For example, they define a "pip" as being equal to a basis point but that's not the case. In fact, the reason they're called "pips" instead of "bips" (market slang for basis points) is because they're not the same thing.[1]

Also, the article kind of glosses over the fact that the wholesale (or interbank) FX market (the article uses the term "Spot Market" which is more commonly used to refer to the subset of the interbank market for spot deals) operates at large scale (e.g. a minimum deal size of $100,000). You can only get the tight spreads (<= 1 pip) available in the interbank market if you're willing to deal in large sizes.

In the same way that the per-unit price for buying several container-loads of cans of beans direct from Heinz will be lower than if you buy a single can from your local retail store, a retail customer looking to exchange $300 can't expect to get the interbank rate.

1: This page - http://www.londonfx.co.uk/trading.html - (written by a friend and former colleague) gives a more accurate description of what a pip is.

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/ (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.

While I use TransferWise for getting paid by clients in other countries, I rely on http://currencyfair.com for my own money movements.

The typical "catch" in most FX services is a hidden 2.5% - 5% fee in the exchange rate itself. You might be offered free, better rates than your bank! and will still be paying 2%.

The likes of CF or TW have got this fee down to well under 1%, although TF certainly give every impression of skimming off the rate for amounts under $1,000.

(at least, that's the impression the rate on their website calculator gives; I've only used larger transfer than that, and can't say anything from experience)

> 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.

People like forex because of the low trading fees and the fact that forex markets are 24/7.

The fact that there are so many 'get rich quick' schemes and 'guides' on forex makes me think that it's a fast way to lose your money.

It's lucrative for the brokers who are making wide retail spreads and getting most of the carry. the leverage available in this market is very high (as high as 100x-400x for retail investors) so the dispersion of individual returns is very high. my guess is that most people like a casino leave with zero in the end...

It's lucrative if you're a professional trader, otherwise, no. I've lost count of how many times I've read of someone blowing up their trade account because they thought it would be easy. Give someone who has no idea what they're doing a lot of leverage and yeah....

I live in the UK and have had a Mondo card for about a month and a half. I've been very pleased with them so far, and there is clearly a big opportunity for them to bring some innovation to traditional banking.

Any specific questions?

I tried to open a Number 26 account. After going through, and passing, their KYC process I found out the account could only be activated through their app. That is despite lack of clarity in their documentation, which I believe clearly suggest activation can be completed online through a browser.

Guess what? Their Android app can only be downloaded through Google's Play Store. I'm running CyanogenMod on my phone without gapps installed, so there was no way forward for me.

Number 26 even sent me a debit card in the post, which I couldn't activate.

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 It's not a bank account but a very useful card with very good exchange rates.