BID and ASK – What does it mean?

Let’s take a look at some terminology embedded within foreign exchange transactions

Have you ever tried purchasing or selling a foreign currency through your bank? Ever wondered why the price at which you are either buying or selling does not entirely match the price that you have seen on the live feed from your liquidity provider? If so, then this weekly blog post was made specifically for you.

Mid-Market Rate

Let’s start with the mid-market rate. This is the rate at which a currency pair (e.g., USD/ZAR) is currently trading (please take note that some brokerages do show the bid and ask price and not a single rate). Think of the mid-market rate as a calculated rate rather than a tradable rate. In short, the mid-market rate is an average rate between the buying and the selling price of a FX pair. The mid-rate, intuitively, is the rate between the spread offered by the market makers.

Bid-Price

Highest price a market participant is willing to pay. This will be the lower price that you are quoted. Think of it as the highest price another market participant is willing to pay for you as the seller.

Ask-Price (offer)

Lowest price someone is willing to sell at. This will be the higher price that you are quoted when trying to buy. Think of it as the lowest price another market participant is willing to sell to you as the buyer.

Conclusion

The reason we sometimes see a mid-market rate is because the Foreign Exchange (FX) market is not a centralized market as opposed to equity market which takes place on an organized market. The key market participants within the FX markets are Tier 1 banks, with roughly 10 of the largest banks holding more than 70% of daily global FX transactions. Thus, the quoted rate will vary between banks but the difference is not significant thanks to active arbitrageurs which leaves the market with little to none price discrepancies.

This is why the mid-market rate might vary slightly between liquidity providers. The difference between the mid-market rate and the execution rate (whether you are buying or selling) is the fee that you pay your bank/broker. In turn, this is why you will never get charged at the mid-rate as it only serves as an indicative rate.

Who are we?

Caveat Capital Management is a strategic advisory firm based in Cape Town. Caveat Capital Management specializes in structuring tailor-made investment portfolios that serve your needs now and grow with you as your needs change. Caveat works to maximize your gains and minimize the risk.

What we offer

Caveat Capital Management has a competitive fee structure that incentivizes the portfolio manager to perform and the renumeration is highly linked to the performance of the portfolio. Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA). Meaning that we have the required licensing to structure full-discretionary portfolios structured to your needs.

Disclaimer

This report does not guarantee the suitability or potential value of any information or particular investment source. The information provided is not intended to, nor does it constitute financial, tax, legal, investment or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified financial adviser. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement or offer by Caveat Capital Management, but is merely an invitation to do business.

Information and content

The information in and content of this publication are provided by Caveat Capital Management as general information about the company and its products and services. Caveat Capital Management does not guarantee the suitability or potential value of any information or particular investment source. The information provided is not intended to, nor does it constitute financial, tax, legal, investment or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified financial adviser. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement or offer by Caveat Capital Management, but is merely an invitation to do business.

Caveat Capital Management has taken and will continue to take care that all information provided, in so far as this is under its control, is true and correct. However, Caveat Capital Management shall not be responsible for and therefore disclaims any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of or reliance upon any information provided. Past performance is not an indication of future performance. Caveat Capital Management does not provide any guarantee regarding capital or performance.

Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA).