Bid and offer
|The Jolly Contrarian’s Glossary |
The snippy guide to financial services lingo.™
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”.
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.
- Also called the bid-ask spread.