Middle Rate

Middle Rate

Table of Contents What Is the Middle Rate? Understanding the Middle Rate Calculation Special Considerations > Middle rate = (bid rate + ask rate) ÷ 2 A transaction executed at the middle rate requires two parties willing to transact in opposite directions (i.e., a buyer and a seller) at the same time. In foreign exchange (forex) markets, the middle rate, also called the mid and mid-market rate, is the exchange rate exactly halfway between a currency's bid and ask rates. A bid-ask spread (informally referred to as the buy-sell spread) is the difference between the highest price that a buyer (the bid) is willing to pay for an asset and the lowest price that a seller is willing to accept (the ask or offer). With the advent of online trading and increased liquidity, bid-ask spreads have tightened to a point where counterparts meeting at a middle rate is less of a real concern since the bid and offer are so close to one another, to begin with.

The middle rate is the exchange rate that is halfway between a currency's bid and ask rates.

What Is the Middle Rate?

In foreign exchange (forex) markets, the middle rate, also called the mid and mid-market rate, is the exchange rate exactly halfway between a currency's bid and ask rates.

The middle rate is the exchange rate that is halfway between a currency's bid and ask rates.
The middle rate is calculated using the midpoint of the bid and ask (offer) rates.
A transaction at the middle rate benefits both parties in that they do not have to cross the entire bid-ask spread.
Trading at the middle rate is most important in markets that are illiquid or have a wide bid-ask spread.
With the advent of online trading and increased liquidity, bid-ask spreads have tightened to a point where counterparts meeting at a middle rate is less of a real concern since the bid and offer are so close to one another, to begin with.

Understanding the Middle Rate

A bid-ask spread (informally referred to as the buy-sell spread) is the difference between the highest price that a buyer (the bid) is willing to pay for an asset and the lowest price that a seller is willing to accept (the ask or offer). An individual looking to sell will receive the bid price while one looking to buy will pay the ask price.

When faced with a standard bid and ask price for a currency, the higher price is what you would pay to buy the currency, while the lower price is what you would receive if you were to sell the currency. The bid price is what someone is willing to pay for a currency, while the ask price is the rate at which someone will sell the same currency. For example, an American traveler is visiting Europe, and the cost of purchasing euros at the airport is displayed as follows:

The higher price (USD 1.40) is the cost to buy each euro. To buy EUR 5,000, someone would have to pay the dealer USD $7,000. Suppose also that the next traveler in line has just returned from a European vacation and wants to sell the euros that are leftover. They have EUR 5,000 to sell, and would the deal would trade at the bid price of USD 1.30 (the lower price), receiving USD $6,500 in exchange for the euros. The middle rate here would be EUR/USD 1.35.

The middle rate is thus the term used to describe the midpoint rate when conducting a foreign exchange transaction.

Calculating the Middle Rate

The middle rate is calculated simply by using the median (midpoint) of the bid and ask (offer) rates. The middle rate, intuitively, is the rate between the spread offered by the market makers.

Middle rate = (bid rate + ask rate) ÷ 2

A transaction executed at the middle rate requires two parties willing to transact in opposite directions (i.e., a buyer and a seller) at the same time. Trading at the middle rate is most important in markets that are illiquid or have a wide bid-ask spread.

Example of the Middle Rate

For example, say the market for the EUR/USD currency pair is trading with a bid price of $1.1920 and an offer price of $1.1930. A buyer and seller wish to transact with each other, and both are seeking price improvement so that they do not have to lift the offer or hit the bid, respectively.

They could agree to execute the trade at the middle rate, which would be $1.1925. Both parties benefit by not crossing the entire spread to execute their transaction. 

Special Considerations

With the advent of online trading and increased liquidity, bid-ask spreads have tightened to a point where counterparts meeting at a middle rate is less of a real concern since the bid and offer are so close to one another, to begin with. Additionally, with fewer foreign exchange transactions happening via brokers, middle rate transactions are less prevalent. 

The mid-market concept can be applied to other financial instruments with two-sided markets such as stocks, commodities, futures, and so on.

Related terms:

Ask

The ask is the price a seller is willing to accept for a security in the lexicon of finance. read more

Bid and Ask

The term "bid and ask" refers to a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time.  read more

Bid-Ask Spread

A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market. read more

Bid Price

Bid price is the price a buyer is willing to pay for a security.  read more

Commodity

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. read more

Currency Exchange

Travelers looking to buy foreign currency can do so at a currency exchange.  read more

Euro

The European Economic and Monetary Union is comprised of 27 member nations, 19 of whom have adopted the euro (EUR) as their official currency. read more

Foreign Exchange (Forex)

The foreign exchange (Forex) is the conversion of one currency into another currency. read more

Futures

Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. read more

Left Hand Side (LHS)

The left-hand side (LHS) is the bid price of a two-way price quote. It denotes the highest advertised price someone is willing to buy at. read more