Spreads can widen due to various factors, which can be better understood by reviewing some fundamental principles.
Liquidity refers to how easily a financial instrument can be bought or sold. It depends on the volume of trades and the number of active market participants. Reduced liquidity can negatively affect order execution, leading to longer processing times and wider spreads.
Situations That Can Reduce Liquidity:
- Macroeconomic Announcements: Events such as central bank interest rate decisions, inflation reports, PMI data, GDP figures, or speeches by central bank leaders (e.g., the U.S. Federal Reserve, Bank of England, Bank of Japan, or Swiss National Bank) often cause a decrease in liquidity.
- Bank Rollovers: During the bank rollover period at 9:00 PM GMT in summer (10:00 PM GMT in winter or 5:00 PM New York time), liquidity decreases as banks and ECN systems pause quoting and withdraw their orders.
- Market Openings and Closures: Lower participation at market opening on Mondays and market closing on Fridays also leads to reduced liquidity.
Impact on Trading
Trading during these periods can lead to undesirable outcomes, such as slippage, where pending orders are executed at a different price due to changes during order processing. In cases of extremely low liquidity, non-market prices may even appear.
At Be Primer Broker, we recommend our traders consider these conditions to effectively manage their strategies and avoid surprises during order execution.