What Is a Nominal Quotation?
A nominal quotation is the hypothetical price at which a security might trade. Nominal quotations are provided by market makers to help traders estimate the value of a proposed trade. However, they do not represent actual offers to buy or sell that security.
To avoid confusion, 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 an actual offer to trade.
- Nominal quotations are estimates of the value of a proposed transaction.
- They are provided by market makers and are commonly preceded by the prefixes FYI or FVO.
- The opposite of a nominal quotation is a firm quotation, which represents a current and binding offer.
Understanding Nominal Quotations
Market makers produce nominal quotations by referencing historical and theoretical positions in that security, although the exact methods for calculating nominal quotations will differ depending on the market maker in question. These nominal quotations play an important role in that they allow traders to estimate the value of transactions without being forced to engage in a trade. As such, they are commonly used in the derivatives markets, such as among futures, options, and foreign exchange (Forex) traders. The terms "nominal quote" and "nominal price" are also commonly used.
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 that fail to abide by firm offers, an offense known as "backing away" from the transaction.
Nominal quotations are especially important for traders who buy on margin. These traders will borrow money from their brokerage provider in order to buy assets with greater leverage. The collateral for the borrowed funds then consists of the assets purchased, in addition to the trader's own cash reserves. Both the margin trader and their brokerage firm must closely monitor the value of the collateral in the margin trader's account. To assist in this, the brokerage firm supplies ongoing nominal quotations for the assets in the account, permitting the trader to estimate the account's value without requiring them to sell their securities.
Real World Examples of Nominal Quotations
Forex traders use a type of nominal quotation known as an indicative quote. Indicative quotes are a type of currency quote that is provided by a market maker to another 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, they will issue an indicative quote.
Similarly, 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 a type of nominal quotation because it permits traders to tentatively agree to the terms of the workable indication while maintaining the right to revise their order for a specified period of time, as opposed to being immediately binding as in the case of a firm quotation.