Primary dealers quote two-way prices and are willing to deal either side, i.e. they buy and sell the base currency up to conventional amounts at those prices. However, in interbank markets this is a matter of mutual accommodation. A dealer will be shown a two-way quote only if he / she extends the privilege to fellow dealers when they call for a quote.
Communications between dealers tend to be very terse. A typical spot transaction would be dealt as follows:
BANK A : “ Bank A calling. Your price on mark – dollar please.”
BANK B : “ Forty forty eight.”
BANK A : “ Ten dollars mine at forty eight.”
Bank A dealer identifies and asks himself for B’s DEM/USD. Bank A is dealing at 1.4540/1.4548. The first of these, 1.4540, is bank B’s price for buying USD against DEM or its bid for USD; it will pay DEM 1.4540 for every USD it buys. The second 1.4548, is its selling or offer price for USD, also called ask price; it will charge DEM 1.4548 for very USD it sells. The difference between the two, 0.0008 or 8 points is bank B’s bid – offer or bid – ask spread. It compensates the bank for costs of performing the market making function including some profit. Between dealers it is assumed that the caller knows the big figure, viz. 1.45. Bank B dealer therefore quotes the last two digits (points) in her bid offer quote viz. 40 – 48.
Bank A dealer whishes to buy dollars against marks and he conveys this in the third line which really means “ I buy ten million dollars at your offer price of DEM 1.4548per US dollar.”
Bank B is said to have been “hit” on its offer side.… Read the rest