What Is the Middle Rate?
- The middle rate, also called mid and mid-market rate, is the exchange rate between a currency's bid and ask rates.
- The middle rate is calculated using the median average of the bid and ask (offer) rates.
- A transaction at the middle rate benefits both parties in that they do not have to cross the entire spread.
Understanding 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 ask (offer) rates. The middle rate, intuitively, is the rate between the spread offered by the market makers.
Middle rate = (bid rate + ask rate) ÷ 2
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 fewer foreign exchange transactions happening via brokers, middle rate transactions are less prevalent.