Lost in translation

Update of 20 Dec 2014: Some information in this post may now be outdated!

Banks routinely gouge their customers out of 1% or more on transacted amounts whenever they exchange one currency into another.  Time to cut out the spread?  Beacon Reports examined the alternatives to convert currency through the online discount foreign exchange brokers.  To do so we informally surveyed over 30 businesspersons from within our network who have made the switch away from banks to using the online brokers.  (Comments from those surveyed appear in Exhibit 1 at the end of this article). We then compared the pros and cons of the available choices.

Three providers stood-out as market leaders. They were XE.com, Interactive Brokers, and Oanda.

Foreign Exchange Broker # of Respondents
XE.com 8
Interactive Brokers 7
Oanda 5
Ozforex 2
Currencyfair 2
Worldfirst 2
Others 7

To better our understanding of the competitive offerings, we registered with XE.com and Oanda. In addition, we secured a snapshot of Interactive Broker’s trading screen shown in Exhibit 2.  These allowed us to get live bid and ask quotations from all of the top three online brokers.

Summary of Results:

Note: Total costs include fees, commissions and spread.  Money transfer fees were excluded.

Beacon Reports reviewed the top three firms to determine the effort required to set up an account, ease of use, minimum account balance requirements, monthly fees, level of customer service, speed of execution and the associated incremental credit risk involved in using an online currency broker.

XE.com and Oanda each offered a simple to establish and simple to use currency exchange service.  Neither have a minimum balance requirement.  Interactive Brokers, on the other hand, is not for the novice.   The firm offers sophisticated traders a global trading system for a range of asset classes of which foreign currency exchange is only one of many.   The registration process is onerous. There is a $ 10,000 minimum opening balance requirement and a smaller $ 10 monthly minimum fee.   For all its inconvenience, Interactive Brokers offered the narrowest spreads and lowest total cost per transaction.  The total cost to convert USD 20,000 to Yen was $3.80.

One unexpected result was XE.com’s wide spread on USD/JPY conversion.  As they are an online discounter, one would have expected their spread to be competitive with that offered by the banks.  This was not the case.  The total cost to convert USD 20,000 to Yen was $531.58. Perhaps XE.com does not heavily trade the USD/JPY pair?  Whatever the reason, our experience highlights the necessity to shop around before exchanging currencies.  Thankfully there is price transparency over the internet and you don’t have to leave your office or home to compare prices.

Perhaps the most important factor to consider is the safety of your money.   When you exchange money through an online broker you are taking on an added credit risk that you would not otherwise expose yourself to.    If there is any doubt about such risks, reflect if you will on Refco, a derivatives company specializing in forex trading. It collapsed in 2005 when its CEO was found to have hidden $430 million in bad debts from the company’s auditors and investors.  More recent financial scandals that have led to partial or total loss of funds include MF Global, Stanford Financial Group and Bernard L. Madoff Investment Securities.  These rip-offs should all give one cause for concern.  A brief synopsis of the trading history of the top three online currency brokers appears in Exhibit 3 below.

Obviously our readers must do their own research and decide for themselves which foreign currency broker is best for them.   Our advice is to first try to negotiate better terms with your current bankers.   Failing that, and then only if you are prepared to bear the added credit risk, the online currency exchange brokers might be worth considering.   Of the Top Three, Interactive Brokers offered the most competitive pricing.  However their trading platform is complex and their minimums high, so we suggest they are not worth considering unless you plan to exchange currency on a frequent basis.

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Exhibits

1.  Download comments received from those surveyed here.
2.  Snapshot of Interactive Broker’s Trading Screen:

 

3. Trading History of the Top Three Online Brokers:

  • Interactive Broker Group is a U.S. Nasdaq publicly traded company founded in 1977.  It has $ 4.8 Billion in capital.  Barron’s Magazine has ranked the firm as the # 1 low cost broker over multiple years.
  • XE trade is a privately held Canadian company founded in 1993.  They claim to “process billions of dollars in currency trades”.
  • Oanda is a private U.S. company incorporated in 1996.  The firm claims that, “over 20% of the world’s online spot forex transactions take place on Oanda’s servers”.

by Richard Solomon, Editor-in-Chief, Beacon Reports.

 

One comment to “Lost in translation”
  1. Hello,
    I’ve been an xe.com user for about three years, but was very happy to learn about significantly lower cost at Oanda from your article. Unfortunately, after going through the rigmarole of setting up an account at Oanda, I learned that Oanda no longer provides this service…

    So, my request to you would be to update or remove your article to save readers the trouble of a long trip down a dead-end road.

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