How to Quote a Quote

In an investment context, a quote is a firm price or exchange rate at which a market maker will either purchase or sell a commodity, security or currency pair to a customer.  Furthermore, quotes can be one sided, in which case the market maker provides only the bid or the offer price that has been requested by the client. Alternatively, quotes can be two sided, where the market maker provides both a bid and an offer price that the client can deal on. The difference between the bid and offer quote provided by a market maker is usually known as the bid/offer spread, or simply the spread.

For example, how to quote a quote properly for the offer side in the EUR/USD currency pair would be the exchange rate at which the market maker was willing to sell Euros and purchase U.S. Dollars in the amount that their client has expressed an interest in dealing.
If this exchange rate quote turned out to be 1.3000 offered, then that would imply that the market maker will charge one U.S. Dollar and thirty cents (or 1.3000 U.S. Dollars) for their client to purchase one Euro.

When learning how to quote a quote professionally, most trainee market makers need to develop experience taking into account several important factors that might need to be reflected in their quotes.  First of all, they need be familiar with and use the quoting conventions appropriate for their market. Next, they need to determine where the market in the security or currency pair is being quoted at other market makers, at well established brokers, on an electronic dealing platform or on an exchange traded market that they have access to in order to obtain a reference price.

In addition, they need to take into account the size of the transaction they are being asked to quote on. Especially large or small transactions tend to be quoted using a wider bid/offer spread around the reference price.

Another key item to take into account when quoting a price is the market maker’s view on whether the market is likely to rise or fall within the time frame that they anticipate holding the position that their client might deal with them.  If they think that the market is likely to rise, then they might show their client a better bid but a higher offer than the reference price.
By InvestorGuide Staff

Copyrighted 2016. Content published with author's permission.

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