Bid and offer

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The “bid price” is the price at which you would buy something (think, in an auction, of making a bid), whereas the “offer price” or “ask price” is the price at which you would sell it. Think of offering to sell your house, or offering something at auction.

Usually a punter like you or me in the market is doing one thing at any time: buying or selling. But there are many market participants — market makers, dealers, brokers, broker/dealers and so on — who make it their business to be buying and selling the same thing— say, a particular bond, stock or currency — at the same time.

These people depend for their livelihoods on being able to sell that thing for a higher price than they can buy it. Thus they will bid a bit low of the genuine consensus value value — the “mid-market price” or “mid” of the item — and offer a bit high. The difference between a broker’s bid and ask is called the brokers’ “bid-offer spread”, or “spread”.[1]

Brokers get away with this because every one does the same thing — you would be a knuckle-head not to — so their competitive advantage comes down to how ’tight is their spread around the mid-market price.

ISDA Ninjas will also see references to “Mid-Market Events” when closing out an ISDA Master Agreement for a Termination Event with two Affected Parties (that is, no naughtiness on the part of one party justifying the other “innocent” party gouging its eyes out on Transaction termination.

References

  1. Also called the bid-ask spread.