Decoding why bid-ask spreads widen (and how to adapt)
Before you buy or sell any asset, you encounter two prices: the slightly lower price buyers will pay and the slightly higher price sellers demand. This gap is the bid-ask spread—the market’s built-in transaction cost and the primary way liquidity providers earn their fee.
But this spread isn’t static. It widens and narrows, acting as a real-time risk meter. Understanding why it expands—during news events, low liquidity, or extreme volatility—is a critical skill for protecting your capital. This guide defines the spread, illustrates it across markets, and reveals the forces that stretch it, equipping you to trade with clearer insight.
The spread defined
The bid-ask spread is the fundamental transaction cost in every financial market. It represents the difference between:
- Bid price: The highest price a buyer is willing to pay for an asset
- Ask price: The lowest price a seller is willing to accept for that same asset
Think of it as the market’s “service fee” – the hidden cost built into every trade you make. The spread is how market makers and liquidity providers earn their keep, and it’s measured in pips (percentage in points), cents, or basis points depending on the asset.
Real-world examples:
1. The currency market (Forex)
EUR/USD Quote:
- Bid: 1.0850 (What you get when you SELL)
- Ask: 1.0853 (What you pay when you BUY)
- Spread: 3 pips (0.0003)
What this means: If you buy EUR/USD at 1.0853 and immediately sell it back, you’d receive 1.0850. The 3-pip difference is your instant loss, meaning the price needs to move at least 3 pips in your favor just to break even.
2. The stock market
Apple Inc. (AAPL) Quote:
- Bid: $182.45 (Market buyers’ best offer)
- Ask: $182.52 (Market sellers’ best price)
- Spread: $0.07 or 7 cents
3. The Cryptocurrency market
Bitcoin (BTC/USD) Quote:
- Bid: $61,423
- Ask: $61,478
- Spread: $55
Why do spreads widen?
While brokers advertise “tight spreads,” these are typically best-case scenarios under ideal conditions. For active traders, understanding why spreads widen is not just academic—it’s a critical survival skill that can protect capital and reveal hidden market truths. Let’s dive into the key moments when spreads expand and what they signal.
1. Low liquidity and trading volume
The why: Liquidity is the lifeblood of tight spreads. It represents the volume of orders readily available in the market. When many buyers and sellers are active, matching orders is easy, and the spread remains narrow. When liquidity dries up, market makers and liquidity providers widen spreads to compensate for the increased risk of not being able to quickly offset their positions and the higher cost of executing the trade.
The when and example:
- Market sessions: The spread for a currency pair like EUR/USD is typically tightest during the London-New York overlap when volume is highest. Conversely, it can widen significantly during the Sydney session’s late hours or on Fridays before the weekly close, as major players exit the market.
- Holidays: Trading on Christmas Eve or during national holidays sees dramatically reduced participation, leading to wider spreads.
2. High-impact economic news and events
The why: This is the most predictable period of spread widening. Events like Central Bank interest rate decisions, Non-Farm Payrolls (NFP), or GDP releases create extreme uncertainty. The “true” market price is unknown for a few moments after the data drop. To protect themselves from sudden, volatile price gaps, liquidity providers massively widen spreads. This acts as a circuit breaker, slowing down frantic trading and ensuring an orderly price discovery process.
The when and example:
-
The 60-second rule: One minute before and after a major news release. For instance, the US NFP report, released on the first Friday of every month at 8:30 AM EST, can cause the EUR/USD spread to balloon from 0.8 pips to 15-20 pips or more in a flash, even on the most premium accounts.
3. Periods of extreme market volatility
The why: Volatility and risk are synonymous in a market maker’s book. During geopolitical crises, unexpected election results, or market crashes (like the 2020 COVID crash), price movements become chaotic and less predictable. The risk of a counterparty defaulting or a trade rapidly moving against a liquidity provider skyrockets. Widening the spread is a direct risk premium for assuming this heightened uncertainty.
The when and example:
-
Black swan events: The Brexit referendum result in 2016 saw spreads on GBP pairs widen to astronomical levels. Some brokers even paused trading momentarily due to the inability to provide reliable prices.
4. The opening and closing of major markets
The why: The market’s “open” is when accumulated orders and news from the closed session are first processed. This creates a surge of orders and initial price discovery, which carries gap risk. Similarly, the “close” can see a flurry of last-minute position adjustments. The brief imbalance in order flow during these windows causes spreads to widen.
The when and example:
-
Sunday open (5 PM EST): The forex market reopens after the weekend. Any geopolitical or financial events from Saturday/Sunday are immediately priced in, causing wider spreads on many pairs for the first hour or so.
Bid-ask spread: broker behavior
It’s essential to remember that the spread you see is also a function of your broker’s liquidity model and pricing type.
- ECN/STP brokers: These brokers typically pass on raw spreads from liquidity providers but add a small commission. Their spreads will widen in direct reflection of the interbank market conditions described above.
- Market maker brokers: While many are reputable, their business model can involve taking the other side of client trades. During volatile times, they may choose to widen spreads beyond the interbank level as a primary method of risk management and profit protection.
The trader’s takeaway: Spread widening isn’t personal—it’s mechanical. Successful traders respect these periods by:
- Avoiding opening new trades just before major news.
- Using limit orders instead of market orders to control entry/exit prices.
- Ensuring their position sizing accounts for potentially higher trading costs (wider spreads) during volatile times.
- Choosing a broker whose execution model and typical spread behavior align with their trading style.
By reading the spread, you’re listening to the market’s whisper about risk, liquidity, and collective fear or complacency. It’s a real-time risk gauge, and wise traders heed its warning.
5 broker reviews: navigating spreads and execution
Here is a selection of five notable brokers, evaluated with a focus on spread behavior, execution models, and suitability for different traders.
Pepperstone
- Min. spread: 0.0 pips (Raw)
- Key review: A top choice for traders who prioritize raw spreads and fast execution. Pepperstone is a leading ECN broker, meaning its Razor account offers direct access to interbank liquidity. Spreads are among the tightest in the industry but will widen predictably during news and volatility, reflecting true market conditions. A commission-per-trade model makes it ideal for high-volume and scalping strategies. Its regulation (ASIC, FCA, CySEC) is premier.
- Best for: Active traders, scalpers, and EAs who need low-latency execution and understand variable spread costs.
FP Markets
- Min. spread: 0.0 pips
- Key review: FP Markets rivals Pepperstone with its excellent raw ECN pricing and deep liquidity pools. It offers both MetaTrader and cTrader platforms, the latter being exceptionally popular with professional ECN traders. Spreads are consistently tight, and widening during events is a direct pass-through from LPs. Its 1:500 leverage (on select entities) and strong ASIC regulation make it a robust platform for serious retail traders.
- Best for: Traders seeking a true institutional-grade ECN environment with multiple platform options.
XM Group
- Min. spread: 0.6 pips (Average)
- Key review: XM operates primarily as a market maker/STP hybrid, offering fixed and variable spreads. Its advertised low minimum deposit ($5) and massive leverage (1:1000) cater to beginners and micro-lot traders. While spreads are generally competitive, traders should be aware that they may widen more than the pure ECN brokers during news, as XM internalizes and manages risk. Its vast global regulation and user base make it accessible but understand the model.
- Best for: Beginner traders, those with very small capital, and traders who prefer bonus offerings and fixed spread options.
AvaTrade
- Min. spread: 0.1 pips (on majors, often higher average)
- Key review: AvaTrade is a well-established, heavily regulated (including the Central Bank of Ireland) market maker known for its fixed spread offerings. This is its key differentiator: during volatile periods, AvaTrade’s fixed spreads do not widen, providing cost certainty. However, this comes at the cost of generally higher average spreads in calm conditions and the potential for requotes. It’s a favorite for traders who fear news-related spread spikes.
- Best for: Newer traders, automated traders using strategies sensitive to variable spreads, and those who prioritize execution certainty over absolute lowest cost.
eToro
- Min. spread: 0.5 pips (on EUR/USD, but varies by asset)
- Key review: eToro is a social trading and CFD platform phenomenon. Its strength is not in ultra-low spreads but in its unique ecosystem of copy trading and a user-friendly interface. Spreads are built into the price and are generally higher than dedicated forex brokers. They will widen during volatile times. eToro is ideal for those who want to invest in ideas and people, not just trade charts. Its 1:30 leverage for retail clients (under ESMA/FCA rules) and high-profile regulation promote a safer, if more limited, trading environment.
- Best for: Social and copy traders, beginners learning from others, and multi-asset investors focused on stocks and crypto alongside forex.
Risk disclaimer: eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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