Market makers come out with a possible price quote to a prospective investor that is subject to change before a transaction occurs. In other words, the dealer/broker is not honor-bound to the quote.
Such quotes are offered to traders looking for currency trade. The transaction volume is not considered here. The quotes are used as exchange rate estimates by investors for specific trading of currency.
Traders make use of the Indicative quote system (IQs), which allows them to make entry of quotes in an indicative order ledger. They subsequently carry out trades on the basis of these quotes. The trades are done mostly in derivatives of low liquidity.
The quote is part of the nominal quotation, which is created by using theoretical and historical security price positions. The benefit of using such quotations is that traders can get comprehensive knowledge about transaction values without actually engaging in the trade.
Unlike the firm quote, which a market maker guarantees, indicative refers to a reasonable assessment of the existing price of a currency. This quote is provided by a broker or dealer when an investor or trader shows interest in a specific currency pair trading. The quote, however, does not include detailed information on the currency like the transaction volume.
The quote is offered when the market shows volatility restricting the transaction ability of market makers at the existing rates.
The quote is preferred by clients when they want to know a rough estimate of the trading amount of currency. This helps them to arrive at a decision. Frequently such scenarios occur when large trades are considered since the risk is high with such trades for every pip or price movement.
Although the value is not altogether accurate, a customer prefers this type of quote as he or she has evinced interest in the transaction.
The dealer offers the best quote without guarantee on the price a currency pair sells or buys at. They supply the ongoing quotes for the required assets, which allow the trader to assess the value of the transaction without actually selling their securities.
In a firm quote, the volume and other pertinent details are added to the price and it is a guaranteed one without any price negotiation. In other words, the maker is honor-bound to ensure the prices remain as per the quote if the client decides to go ahead with the transaction.
Advantages of Using Indicative Quotes
The system does not require an initial margin as the validation is realized prior to the execution of the trade. It also minimizes the risk occurring on execution for the makers as they can opt-out of the trade. The system allows the use of extensive trading strategies across multiple instruments of low liquidity.
A US company is considering the acquisition of a German corporation for 100 million Euros. The company requests an indicative quote to assess the rough amount needed for the transaction. The exchange rate for EUR/USD pair quoted by the broker may be 1.1040/43
In the above value, the bid price is 1.1040 and the asking rate is 1.1043. However, the firm or precise price can change to 1.1045 with the broker not honor-bound to adhere to the indicative price. Thus, the quote is also termed an indication or price indication.
The key purpose of requesting an indicative quote is to get a fair concept of the existing exchange value. Using this estimate, a trader can enter into a transaction in forex but the broker is not obliged to guarantee the same prices present during the transaction.