Can someone please explain what “Up the bid down the ask” means to me. I am sitting here with my schweser trying to figure it out and cant. I need something that will stick when trying to figure out triangular arb using bid ask quotes. If you guys have any other method I would appreaciate hearing what you use.
Thanks
I have no idea if that’s what they mean but for me it is like this:
You have a direct quote Domestic/Foreign. Domestic is the numerator (up), foreign quote the denominator (down).
If you want to change from foreign to domestic (go up from denominator to nominator) use the bid price.
If you want to change from domestic to foreign (going down to the denominator) use the ask price.
I’ve no idea if that’s what they want to say… but it’s correct anyhow.
For anybody having trouble with this exchange rate stuff I have just (re)read Elan’s notes on the subject and I think they are awesome. They do a really good job with Econ. Everything else they did in Level 2 was absolute $%#@ (in my humble opinion) but who ever wrote the Econ stuff knew what they were talking about, and more importantly were able to write it out in a logical format that even I could understand.
To buy you have to accept what they are asking. To sell, unforunately, you have to accept what they are bidding.
[original post removed]
i love up the bid and down the ask. makes that reading easy! not sure what all the fuss is about.
I hate up the bid and down the ask. For me, I just think of it like this… dealers don’t give away arbitrage opportunities. Every time you need to exchange a currency, you’re going to get the short end of the stick. Each time you see a spread, do the conversion that leaves you with the least amount of currency afterwards. Keep doing that until you’ve reached your destination currency, and there you have it.
I also do the same thing with cross exchange rates. Basically try each iteration until you get the widest bid-ask spread in your desired exchange rate. There are only a few iterations you need to try. And my logic is the same. The dealer is just gonna screw you every time you need to exchange a currency.
Is my logic or method flawed in either of these posts?
This is precisely what up the bid and down the ask meant.
Given rate of X / Y : 1.5 - 1.6. You can use 1 unit of Y to buy 1.5 unit of X (up from Y -> X, use the bid price). Or you can use 1.6 unit of X to buy 1 unit of Y (down from X -> Y, use the ask price).
What I do is just which one screws you ove more (make you have less). Usd/euro = 1.5 -1.6 . Let’s say I have 1000 euro and I want usd. I can multiply by 1.5 or 1.6. I multiply by 1.5 because I get less. If I had 1000 usd and I want euros I divide it by 1.6 cause it gets me less euro. Banks always try to screw you over
That is another way to look at it because dealers have to earn a spread on bid ask pricing.
This is a good explanation. It doesn’t have to do with which way you go over “the triangle” but it has to do with the quote when this is stated on algebraic form (such as USD/GBP). Don’t forget that it changes when you invert the quote ( invert as in 1/n) so 1/ask becomes bid and vice versa.