What Is a Two-Way Quote?
A two-way quote indicates both the current bid price and the current ask price of a security during a trading day on an exchange. To a trader, a two-way quote is more informative than the usual last-trade quote, which indicates only the price at which the security last traded.
Two-way quotes are most commonly seen on the Forex, the foreign exchange, market.
- The usual price quote on an exchange shows the last price at which a security traded.
- A two-way quote shows both the current bid price and the current ask price.
- Two-way quotes are commonly used in the foreign exchange market.
Understanding a Two-Way Quote
A two-way quote tells traders the current price at which they can buy or sell a security. Moreover, the difference between the two indicates the spread or the difference between the bid and the ask, giving traders an idea of the current liquidity in the security.
A smaller spread indicates greater liquidity. There are enough shares available at that moment to meet demand, causing a narrowing of the gap between the bid and ask.
Here's an example of a two-way quote for a stock: Citigroup $62.50/$63.30. This tells traders that they can currently purchase Citigroup shares for $63.30 or sell them for $62.50. The spread between the bid and the ask is $0.80 ($63.30-$62.50).
About the Bid-Ask Spread
Whether the trading is in stocks, futures contracts, options, or currencies, the bid-ask spread is the difference between the price quoted for an immediate sale, or offer, and an immediate purchase, or bid.
The difference between the bid price and the ask price is an indicator of the liquidity of the security.
The size of the bid-offer spread is one measure of the liquidity of the market and the size of the transaction cost. If the spread is zero, the security is called a frictionless asset.
The Lingo of Liquidity
A buyer demands liquidity when initiating a transaction. On the other side of the trade, a seller supplies liquidity. Buyers place market orders and sellers place limit orders.
A purchase and sale together are called a round trip. In effect, the buyer pays the spread and the seller earns the spread.
All limit orders outstanding at any given time make up the so-called Limit Order Book. In some markets, such as the NASDAQ, dealers supply liquidity. However, on other exchanges, notably the Australian Securities Exchange, there are no designated liquidity suppliers. Liquidity is supplied by other traders. On these exchanges, and even on the NASDAQ, institutional investors and individual traders supply liquidity by placing limit orders.
The bid-offer spread as shown in a two-way price quote is an accepted measure of liquidity costs in exchange-traded stocks and commodities.
The Costs of Liquidity
On any standardized exchange, two elements comprise almost all of the transaction costs: brokerage fees and bid-offer spreads. Under competitive conditions, the bid-offer spread measures the cost of making transactions without delay.
The price difference is paid by an urgent buyer and received by an urgent seller. This is called the liquidity cost. Differences in bid-offer spreads indicate differences in the liquidity cost.