What Is Nominal Quotation?
A nominal quotation is a hypothetical price at which a share of stock or some other security might trade. The opposite of a nominal quotation is a firm quotation, which represents a binding offer to trade at a specific price.
- Nominal quotations are provided by market makers to help traders estimate the value of a proposed transaction before making a decision.
- Symbols in nominal quotations are preceded with the prefixes FYI (For Your Information) or FVO (For Valuation Only).
- The opposite of a nominal quotation is a firm quotation, which represents a current and binding offer to make a transaction at that price.
Understanding Nominal Quotation
Nominal quotations are provided by market makers to help traders estimate the value of a proposed transaction before making a decision. They do not represent actual offers to buy or sell the security. To avoid confusion, the symbols in nominal quotations are preceded with the prefixes FYI (For Your Information) or FVO (For Valuation Only).
The exact method for calculating nominal quotations differs depending on the market maker. Generally, market makers produce nominal quotations by referencing historical and theoretical pricing in that security,
Nominal quotations are intended to allow traders to estimate the value of an asset before initiating a trade. They are commonly used in the derivatives markets, including the futures, options, and foreign exchange (forex) markets. In different markets, nominal quotations may be referred to as nominal quotes or nominal prices.
The opposite of a nominal quotation is a firm quote, which is an actual offer to buy or sell a security. Firm quotes are not subject to cancellation. In fact, the Securities and Exchange Commission (SEC) punishes market makers who fail to abide by firm offers, an offense known as backing away from a transaction.
Nominal quotations are especially important for traders who buy on margin. In margin trading, an investor borrows money from a brokerage provider in order to buy a larger quantity of the security. The collateral for the borrowed money consists of the assets purchased on margin in addition to the trader's own cash reserves.
Both the margin trader and the brokerage firm have a strong incentive to closely monitor the value of the collateral in a margin trader's account. So, brokerage firms supply nominal quotations for the assets in the account, permitting their value to be tracked.
Nominal Quotation Examples
- Foreign exchange traders use a type of nominal quotation known as an indicative quote. This is a type of non-binding currency quote, provided by a market maker to a counterparty. 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, the market maker will issue an indicative quote.
- Municipal bond traders use what is called a workable indication to estimate the price and supply of a particular bond issue. The workable indication is another type of nominal quotation. That is, it permits a trader to tentatively agree to the terms of the workable indication while maintaining the right to revise the order for a specified period of time. By contrast, a firm quotation is immediately binding.