What is a Nominal Quotation
A nominal quotation is a non-binding price given by market makers to estimate the value of a proposed trade. These prices are usually preceded by a notation to indicate they are approximate and derive their basis from historical and theoretical positions. The bond, futures, options, and foreign exchange markets will use nominal quotes. A nominal quotation is also known as a nominal quote or nominal price.
BREAKING DOWN Nominal Quotation
Nominal quotations allow traders and market makers to establish an estimated value of securities without being forced to engage in a trade. With these quotes, the price and quantity of a bid or ask quote are still negotiable by the interested parties. Different exchanges or brokers may calculate nominal quotations in different ways using varying benchmarks and historical charts.
A firm quote is a bid to buy or offer to sell a security or currency at the firm bid and ask prices, that is not subject to cancellation and is the opposite to a nominal quotation. The Securities and Exchange Commission (SEC) rules require market makers to abide by firm offers to buy or sell securities. Market makers who fail to honor quoted bids face punishment for a violation called backing away. To avoid confusion, market makers will usually identify nominal quotations specifically as informational or for valuation use only. (For Valuation Only (FVO) and For Information Only (FYI)
Nominal Quotes for Bonds, Currency, and Margins
Nominal quotations also allow brokers to provide prices for informational purposes only, without obligating the broker to enter a trade at a particular price or volume. As an example, a workable indication is a nominal quote expressed in the municipal bond market showing the amount at which a dealer is willing to either buy or sell a particular issue. This indicator differs from a firm quote as revisions to the offer are allowed within a specified period, usually one hour.
In forex (FX) trading, an indicative quote is a currency quote that is provided by a market maker to another counterparty. However, this rate is not firm or binding. When a market maker offers an indicative quote to a trader, the market maker is not obligated to trade the given currency pair at the price or the quantity stated in the quote. If a trader or client requests a quote for a currency pair but does not specify the amount for trading, or if there is some doubt as to the market maker's ability to transact the currency pair at the bid or ask quoted they will issue an indicative quote.
Nominal quotations are necessary for traders who buy on margin. These traders will purchase an asset by using leverage and borrowing the balance from a bank or broker. Buying on margin is the acquisition of an asset by using leverage and borrowing the balance from a bank or broker. Buying on margin is the initial down payment made to the broker for purchasing an asset. The collateral for the borrowed funds are the securities held in the investor's account. Since a trader needs to know the current value of an asset they own without being obligated to sell, they could place a nominal quotation.
For example, a trader might consider purchasing a contract on the futures exchange, only to find that no market maker has published a firm bid price. Therefore a price for the contract has not been established for an extended period. In that case, the trader could request a nominal quotation to get a sense for what market makers might offer under current conditions before deciding whether or not to pursue an actual contract.
In another use of nominal quotations, a corporation would value their assets and debts at a specific moment in time when they produce a balance sheet.