DEFINITION of 'Middle Rate'

The middle rate is a term used to describe the average rate agreed upon when conducting a foreign exchange transaction. The middle rate is calculated using the median average of the bid and offer rates. The middle rate intuitively is the rate in the middle of the prices offered by the market makers.

BREAKING DOWN 'Middle Rate'

A transaction at the middle rate requires two parties wishing to transact in opposite directions (one buyer and one seller) at the same time. 

For example: If the price of EUR/USD is trading with a bid price of $1.1920 and an offer price of $1.1930 and two parties, a buyer and seller, wish to transact with each other they could do so at an agreed middle rate, which would be $1.1925. Both parties benefit by not crossing the entire spread to execute their transaction. 

With the advent of online trading and increased liquidity, spreads have tightened to a point where counterparts meeting at a middle rate is less beneficial. Also, with less foreign exchange transactions happening via brokers, middle rate transactions are less prevalent. 

The middle market theory can be applied to other financial instruments such as stocks, commodities, futures, and many more. 

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