There is a BID price and an ASK price, because there is a market-maker somewhere in the price chain – not simply because there are buyers and sellers.
All markets have buyers and sellers, but not all markets are defined by BID/ASK pricing. The real estate market is an example of an active market with energetic buyers and sellers, but the negotiated contract prices arrived at by those buyers and sellers are not the result of BID/ASK pricing.
In our market, the retail spot forex market, there can be market-makers at two, or even three, different levels. One of those market-makers is always the top-tier bank offering to transact business with your broker. But, your broker might be a market-maker, as well.
Let’s examine the simplest case – in which the top-tier bank is the only market-maker between you (the retail customer) and the market (the worldwide foreign exchange market, represented by the interbank network). In this case, the bank continuously communicates to your broker a pair of prices – BID and ASK. The bank is saying, in effect —
- We will either BUY or SELL this currency pair, depending on what you, Mr. Broker, want to do. If you want to SELL to us, we will BUY from you at our BID price. On the other hand, if you want to BUY from us, we will SELL to you at our ASK price. It’s your choice, and we’re happy to have your business, either way.
An analogous situation is your local coin dealer. If you walk into his store, looking to buy a one-ounce gold coin, his (ASK) price might be $1,305. On the other hand, if you walk in, looking to sell a one-ounce gold coin to him, his offer (BID) might be $1,254. He has added 2% to the New York spot price of gold (assumed to be $1,280 in this example), to determine his ASK price. And he has subtracted 2% from the spot price, to determine his BID price.
If the top-tier bank in the forex scenario above is the only market-maker in the price chain, then your broker simply offers to you (the retail customer) the same BID and ASK prices dictated by the bank – and he adds a commission to any transaction you choose to make, in order to cover his costs and earn a profit.
On the other hand, if your broker is also a market-maker, then he will function much like the coin dealer described above. That is, he will take the prices offered to him and mark them up or down to determine the ASK prices and the BID prices that he displays on his trading platform. He might add a pip to the bank’s ASK price, and subtract a pip from the bank’s BID price, offering to you a spread that is 2 pips wider than the spread offered by the bank.
In every case, the prices you see on your broker’s platform are take-it-or-leave-it prices, if you want to transact business right now. That is, your broker is the price-maker, and you are the price-taker, and prices are not negotiable.
Changes in the BID and ASK prices offered by the top-tier banks (to their second-tier customers – including, for example, your broker) are driven by BUYING PRESSURE and SELLING PRESSURE coming from numerous points in the market.
In order to stay relatively flat, the bank continuously adjusts the BID prices it is willing to pay, and the ASK prices it must charge, for every currency on the menu. In other words, the bank is not concerned with what the EUR (for example) is “worth”. Rather, the bank is concerned with the prices (plural) at which EUR flowing into the bank will be balanced by EUR flowing out of the bank.
An increase in buying pressure, relative to selling pressure, forces the bank to increase its BID and ASK prices. Conversely, an increase in selling pressure, relative to buying pressure, forces the bank to lower its BID and ASK prices.
I hope that wall-of-text helps to answer your questions.