Inaccurate USD-RM exchange rate: Does it really matter?

Inaccurate USD-RM exchange rate: Does it really matter?
"Inaccurate USD-RM exchange rate: Does it really matter?"

On March 15, Google erroneously published the US dollar to Malaysian ringgit exchange rate. Some screenshots that went viral on social media showed the ringgit at 4.9800 to US$1.

Subsequently, Bank Negara Malaysia published a press release explaining the error. Still, a certain segment of the public was sceptical. As usual, these views are heavily influenced by personal politics.

In a market where middlemen can make a lot of money, the gap between purchase and selling prices can be significant. In financial markets, this gap reflects some features of the underlying. It could be that the traded thing is hard to sell – something known as illiquid. Or the asset is risky. Either way, the gap between purchase and selling price reflects the extra risk a trader is taking.

In April 2022, the Bank of International Settlements estimated that the daily foreign exchange market turnover to be around US$7.5 trillion. With that kind of volume, you can expect the foreign exchange market to be highly developed, efficient, and highly liquid. This enables the market to offer very small spreads, the difference between buying and selling prices for most currency pairs.

These small foreign exchange trading spreads are not only enjoyed by big trading houses trading tens or hundreds of million dollars every day. It probably can partly be credited for the rise of retail foreign exchange trading in recent years.

Despite the efficiency gain from the sheer volume of business and advancements in technology, the foreign exchange market is still an over-the-counter (OTC) market. In an OTC market, traders, brokers, and other participants solicit quotes from one another.

Thanks to electronic trading platforms, participants in the foreign exchange market can see the best quote in the market. Traders can see other quotes and adjust their offer (to sell) or bid (to buy) to be competitive. As a result, you get a rate or price that is the reflection of where the market rate is, at a particular time.

Once in a while, you can get a quote that is a bit off. The trader on the other side may not be keen to take risks, or if in the opposite mood, is extra aggressive. But again, due to the size and efficiency of the modern foreign exchange market, these differences are small.

That is why the Google error is more egregious – it couldn’t possibly get 4.9800 from wherever it sources its rates, if the market is around 4.7000. In terms of trading, that is the difference between mistaking the size of Singapore and Australia.

If you Google “daily ringgit turnover”, your first search result will take you to Bank Negara’s website, showing the daily foreign exchange turnover. In recent times, the volume is between US$15 billion and US$20 billion a day. If that number is a reflection of day-to-day demand for foreign exchange in Malaysia, then to move the ringgit by three to four per cent in a day, would probably take multiples of that, and set half of the country on fire. So, the Google number does not make economic sense.

There are people of a certain political persuasion who are convinced that the erroneous Google rate is another proof that the economy is going south. I wonder if any of them got filthy rich doing arbitrage trade on that day.

But I am confident on March 15, 2024, bank and company treasurers in Malaysia and Singapore, people who actually buy and sell ringgit, didn’t give it a second thought. I hope we don’t waste more time the next time Google publishes an erroneous exchange rate.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.

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