Spreads will widen for a variety of reasons.
Spreads are constantly changing in the ECN style market structure we have at Apiary. The spread is either set naturally by pending orders in the market or, if the market is not liquid, the liquidity provider sets it. Liquidity provider’s use spread to either encourage or discourage the trading and to manage risk.
Spreads will widen or shrink throughout the day. It is common to see spreads fluctuate during the opening or closing of trading sessions.
Spreads will also adjust for
- Uncertainty in the direction of prices
- News events
- Volatility shifts
- Changes in liquidity
Spreads help a liquidity provider manage risk by either encouraging or discouraging the trading of the liquidity provider’s currency inventory. For example if a liquidity provider wants to move inventory, they might narrow the spread to encourage trading. Similarly, if they want to retain inventory, they might increase spreads to discourage trading in that currency.
The magnitude of the spread influences the degree to which a liquidity provider wants to encourage or discourage trading. Obviously, during uncertain times of high volatility and news events, it’s common to see spreads widen--sometimes significantly!