I don't understand this system. I've tried with several different items and it's nearly impossible to lose. Plus, you don't gain anything from it. I know it's used in some leves, but it just seems like a game of chance with no real point.
It pops up on the menu if you are targeting the right npc. The same way synthesize, summon retainer, and trade do at other times. I really hate that, since I never notice those icons pop up in the top center. >.< Also why is it an ability if you can't equip it? That just makes it confusing.
Parley is a game you can play for a chance to win an item by wagering an item of your own from what I can tell. I found the Parley NPC in Ul'dah - Baterich. At the moment it looks like all you can do is learn how to Parley - the item you wager is the same as the item you receive back if you're successful.
The NPC in Gridania (Aubrenard whose East of Fen-Yll Feneries before you go into the buildings of Rosewood & Ebony Stalls) is now working, but like MelisandeShahrizai said, you can only win the same items back. 11/4/10