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Ask Your Advocate: Why Do Some Forex Brokers Widen Spreads?

22 Years ago | February 07, 2014 1/28/23, 12:00 AM

Question for the Advocate:

Why do some forex brokers widen spreads around data releases and when the U.S. closes? Are they looking to rip off stops?

Your Advocate Says:

While some brokers use widening spreads to run stops, the more reputable brokers widen spreads when conditions warrant. I am not one to defend brokers but assume it has to do with bank market liquidity.  Forex brokers aggregate pricing from various sources in an effort to get the tightest spreads for themselves when quoting their clients. The more substantial brokers have better access to what is called tier 1 pricing while those brokers with less capital probably have to rely more on lesser tier 2 and tier 3 pricing.

In any case, many brokers adjust their spreads based on what pricing they are seeing from their liquidity providers (e.g. banks). When banks either pull out or widen spreads depending on market conditions, brokers widen their spreads to protect themselves. This can happen around data release times and the crossover period to a new day. The extent and duration of spread widening is an individual decision.

The issue for electronic trading is that when spreads widen you can get stopped out even if the “real” market is not actually trading at that price. In any case, you need to be aware of how your broker quotes under various conditions and adjust your trading accordingly.

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