A client’s cost of transacting in the currency market is equal to the profit that a sell-side bank earns on the trade from its market-making operations. On average, the market-making banks trade at the mid-market rate, and hence earn the difference between the transacted rate and the mid-market rate, ignoring any proprietary risk-taking profits or losses.

The client’s cost is then simply the difference between the transacted rate and the mid-market rate in percentage multiplied by the volume of the transaction. Market-making banks do not themselves charge a commission to trade FX. This is further evidence that they capture a good portion of the bid / ask spread to compensate themselves for the risk taken in providing liquidity.

The Mid-Market Rate

Due to the OTC nature of the FX market, data is often patchy and incomplete. It is generally known that FX market participants cannot reach consensus on market volume. FX market participants do, however, reach consensus around where the mid-market spot and forward rates (usually out to one year) are for most currencies.

The mid-market spot rate can be moved along the forward curve using interpolation, provided one has an international business day calendar and good understanding of FX forward pricing, including day-count conventions. Using the forward market, investors can compare their execution rate to the mid-market rate that matches their settlement date.

On Average, Market-Making Banks Trade at the Mid-Market Rate

In the interbank market, crossing the bid / ask spread is a zero-sum game between the market makers, because every transaction has a passive participant, or price maker, and an active participant, or price taker. It is reasonable to assume that the spot EURUSD trader at “Market-Making Bank A” and the spot EURUSD trader at “Market-Making Bank B” have roughly the same skill set, and therefore they are equally adept at getting the best market rate for their respective banks.

In the long run, half of the time the EURUSD trader at “Market-Making Bank A” trades on the passive side of the bid / ask spread, and half of the time he crosses bid / ask and trades on the active side of the spread. His counterpart at “Market-Making Bank B” has a similar experience over the long run. Hence, on average, sell-side traders transact at the mid-market rate.

Brokerage firms

Non-bank brokerage firms do not have access to this rate directly, instead having to themselves transact with the larger market making banks. However, the costs associated with this are paid directly to the market making bank. So from the perspective of the end client (corporate or institution) this can still be considered ‘commission’ paid when benchmarking an FX trade.


Given the inherent issues surrounding volume in OTC foreign exchange markets, the mid-market rate provides a universally applicable cost benchmark. This is most aptly reflected in the prominence given to the mid-market rate by most market-making banks on their electronic trading platforms. Mid-market rates are readily available to most investors, and provide the optimal benchmark for those seeking to quantify transaction costs in OTC foreign exchange.

If you would like to receive insight into how much you have paid your bank or broker to trade FX, please sign up for a free trial today. You can upload a sample set of trades using our FX trade cost analysis (TCA) tool and see the results for free.

Leave a Reply