Market order: How to buy currency at the rate you want

Foreign exchange rates are constantly moving and can be volatile at the best of times. As a buyer of foreign exchange, sometimes you need your desired currency right away, while at other times you might be willing to wait for a better deal.

For non-urgent transfers, a market order can be used to transact on your terms. This can be very useful for individuals and businesses who have requirements with longer lead times, and who can afford to be picky about when they transact.

In this post, we’ll explore how a market order works and list the services offering this payment feature.

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What is a market order?

A market order is a payment type that allows you to request that your desired currency be bought or sold if its exchange rate reaches a predetermined level sometime in the future. It is a product typically offered by banks and specialised money transfer services, who can take your instructions and automatically acquire the currencies you require, based on the criteria you set in advance.

If you don’t require currency immediately but you do need it eventually, a market order can be useful for obtaining what you want at a preferred rate. This is most appropriate for individuals and business who have specific foreign exchange requirements in the medium to long-term, who also have the flexibility to delay acquisition until if and when a better rate becomes available.

For example, consider that the current spot exchange rate for GBP/USD is 1.3000. You need to purchase US Dollars but you’re not quite happy with the exchange rate right at the moment. You have a feeling that the rate might improve over the next few months, so you place a market order to buy at 1.4500. Three months later, the GBP/USD rate reaches 1.4500 and the US Dollars are automatically purchased on your behalf.

What services can arrange a market order?

Here is a list of services that offer a market order. Beside the name of each service, we have included its average cost, speed of transfer, receiving countries, and our review score – sorted from highest to lowest.

To sort this chart by column, click its respective headings. If you are reading on mobile, you may need to scroll horizontally to view all fields.

Why use market orders?

A market order enables you to target an exchange rate that is currently not yet available. Many money transfer services offer foreign exchange market research and commentary, and this can be used to set your expectations for the future. The use of market orders can be helpful for maximising the value you obtain when entering into a foreign exchange transaction.

Now, just because you have a feeling that an exchange rate will reach a certain level, does not mean that this will occur. But if you have the time and patience for it, a market order is the best way to ensure that when your desired rate is hit, you will secure it for the amount you want to exchange. And, if in the meantime you change your mind, the order can be amended or cancelled prior to any transaction taking place.

For all its benefits, however, a market order is not appropriate for all situations. If you require an immediate transfer, then a spot contract or cash pickup is way to go. Or, if you’re trying to hedge against adverse movements, a currency forward contract or foreign currency options may be more appropriate. But if you want to secure the best possible rate that is not yet currently available, a market order is the feature for you.

Types of market orders

There are two types of market orders, each serving a slightly different purpose: limit order and stop-loss order.

Limit order

A limit order enables you to set a specific rate of exchange that is above the current market levels. Once this rate is reached, your desired currency will automatically be purchased. Limit orders are particularly useful if you know you need to make a payment in a foreign currency at some point in the future, but are not bound by tight deadlines.

For example, consider that you’ve just immigrated from Australia to the United Kingdom. You have life savings in Australia but are aware that the AUD/GBP has taken a hit in recent times. Instead of making a transfer at the current spot rate, after looking at the historical trading history of the pair, you set a limit order at a level so when the currency recovers, your transfer will be made automatically.

Stop-loss order

A stop-loss order works in a similar fashion to a limit order, but instead of specifying the ideal rate at which you want to purchase currency, you specify the minimum exchange rate at which you would be willing to transact. This is suitable for ensuring that you can meet your financial obligations if that market was to move unfavourably against you.

For example, consider that you’re holding a balance of British Pounds, and you’ve just purchased a property in Spain. You’ve negotiated the purchase price in Euros on the basis of today’s exchange rate. You have decided that the maximum you’re prepared to pay if the rates changed in the short term. You set a stop loss in GBP/EUR to automatically exchange your Pounds to Euros if the rate drops below your budgeted rate.

What does a market order cost?

There’s no charge or fee involved in arranging a market order; well, not directly anyway. While it may not cost anything to place a market order, there is a cost incurred when the transaction is eventually executed. These usually include a transaction fee, and the spread in the exchange rate; which is the difference between the interbank mid-market rate, and the rate offered to you by a money transfer service.

If you would like to read more about what type of costs to expect, take a look at our post on how to compare money transfer services.

Market order example: A basic hedging strategy

In addition to being used in isolation, a limit order and stop-loss order can be used in conjunction as a basic risk management strategy. By framing them up as an exchange rate window, you can set a limit order to trigger an ideal rate, while at the same time setting a stop-loss order as a minimum viable rate. This way, you can aim for reaching a favourable exchange rate, and at the same time protect yourself from adverse movements if things don’t go your way.

Consider a scenario where you operate a business in the United Kingdom with a wholly-owned subsidiary in the United States. You are servicing a $100,000 loan facility in the United States, and currently hold a balance of these funds in Pounds. The current GBP/USD rate is 1.3000, but you’ve received advice that the rate might move favourably in the coming months. As a result, you set an ideal transaction rate of 1.5000, with a stop-loss order of 1.2000 to protect your downside risk.

A few months down the track, the Pound appreciates against the Dollar and the limit order is triggered at 1.5000. The cost of funding the loan facility has reduced from £76,923, at the original spot rate, to £66,666 – an overall saving of £10,256. In this case, the strategy has successfully allowed your business to benefit from a favourable movement while protecting you from adverse conditions.

Conclusion

A limit order can be used to obtain a more favourable exchange rate if you have the time and patience to wait for it. The stop-loss order variety can also protect you from downside risk if markets unexpectedly move against you. Used together, a market order can form a basic risk management instrument, which can be particularly helpful for individuals and businesses who have foreign currency requirements in the medium to long term.

If you have any questions or feedback, let us know in the comments below.