Quotations of Forex Market

INFORMATIOEN OF FOREX CONTENT OF QUOTATIONS

The quotation given by a bank when compared with the market, or the quotations that most other people are making can yield information on the type of transaction that the bank wishes to perform, i.e., whether it prefers to buy or sell. Such a comparison may also convey some information as to the opinion of the bank about the future forex trends in that currency. For example,
Bid Offer
Standard market quotation 10 9
Specific bank's quotation 15 13
This difference in numbers can be explained in either of two ways:
(1) The bank wishes to sell, or
(2) it thinks that the market price will come down.

Customer Dealing With Bank

For the customer dealing with the bank, the 9-13 quotes are better than the market if the customer wants to purchase the currency. The bank's quote makes it possible for the customer to purchase at 13, instead of at the standard rate of 15. If the customer wishes to sell the currency, and then the market offers a better alternative than the specific bank. Thus, the quotation from the bank is designed to give an incentive to people to purchase from this specific bank. This incentive is justified either if the bank has excess funds in that currency, or if it expects the price of the forex trading currency to drop. As to the other side of the quotation, if any ill-informed market participant sells to the bank at 9, the bank still has the opportunity to resell the acquired funds at the market rate of 10. In other words, although the bank basically does not want to buy, it still does so happily at 9. The forex institute market is bidding 10, and the bank can sell immediately at 10. The degree of departure of the bank's rate from the prevailing rate will indicate the extent to which one of the explanations presented above holds true for the particular bank. Thus, in this case, if the bank were really pressured to sell the currency, it might go so far as to quote 9-12.
If the bank's quotation were 12-16, it would clearly show that either the bank wants to be a buyer of the currency or that it expects its value to increase. Again, if the bank were very eager to maintain this posture, the quotations would likely go as far as 13-16.5 It is obvious from this discussion that the party quoting the rate is in an advantageous position, provided the quotes know what the market exchange rate is. The trader can choose the bid and offer rates to quote in such a way that nothing can go wrong. The trader either accomplishes the objective pursued with a quote at odds with the market or makes a profit in an involuntary transaction suggested by an ill-informed trading partner.

Potential Problem

One should be forewarned; however, that one danger of taking the previous paragraphs literally is that the techniques of using bid and offer risk rates intelligently are well known by the market. Therefore, one potential problem is that of second-guessing the motivation of the bank. Given that the bank knows that variations in quoted rates will be interpreted in a certain fashion, it may choose to use this conduit to convey special information which may not coincide with what the bank actually wishes to do.
There is one additional advantage in favor of the trader. Every time that someone else responds to the trader's quote, information is gained. For example, the calling party may answer by bidding in between the prices quoted by the trader. This procedure is not uncommon. If the quoted rate is 10 bids and 14 offers, the calling party may state a wish to sell at 11. The trader, the quoting party, mayor may not improve the bid rate from 10 to 11. Even if the trader chooses not to buy at 11, information has been acquired about one market participant.