Why Spreads Widen During Volatile Market Conditions

The spread on any instrument is not a fixed number. It is a price that reflects current market conditions, which change. During volatile sessions, particularly around major data releases, central bank decisions, or sudden geopolitical events, spreads can widen substantially from their normal levels. Understanding why this happens and predicting when it is most likely to occur changes how you manage the cost of entering and exiting positions.

The Spread Is a Risk Price

Market makers and liquidity providers, the firms that continuously quote bid and ask prices in financial markets, make their revenue from the spread. They buy at the bid and sell at the ask, and the difference is their revenue on each transaction.

Their risk is being caught on the wrong side of a large directional move while holding inventory. If a market maker buys EUR/USD at 1.08498 and the price immediately drops to 1.08450 before they can offset the position, they have lost 4.8 pips on that unit of inventory. Managing that inventory risk is the operational core of market making.

Under normal conditions, the price movement between when a market maker acquires inventory and when they can offset it is small. The spread comfortably covers that risk, and the market maker can offer tight quotes because the probability of an adverse gap in their inventory is low.

Under volatile conditions, that probability rises substantially. A news release can move EUR/USD 30 pips in a second. In that environment, the market maker’s risk of being caught with inventory on the wrong side of a sudden move is dramatically higher. The rational response is to widen the spread, extracting more revenue from each transaction to compensate for the elevated liquidity risk.

When Spread Widening Is Most Pronounced

Spread widening does not occur randomly. It concentrates around identifiable, often scheduled events.

Major economic data releases. Non-Farm Payrolls, CPI, GDP, and central bank rate decisions are the most significant. In the minutes immediately before and after these releases, spreads on affected instruments routinely widen by a factor of three to ten times their normal level. EUR/USD, which might normally trade at a 0.5-pip spread, may trade at a 3- to 5-pip spread in the seconds around an NFP release. The widening begins before the release as liquidity providers pre-position for the increased risk, and peaks at the moment of the release. It normalises within one to three minutes as the market establishes a new level.

Gap opens. When markets reopen after a weekend or a session close, any news that developed during the gap creates immediate uncertainty about the correct price level. In those opening moments, before sufficient two-way flow has been established, spreads are wider than normal as liquidity providers wait to observe the market’s direction before committing to tight quotes.

Flash events. Sudden, sharp movements without a clear catalyst, the kind described in Why Liquidity Disappears During Market Stress, produce the most extreme spread widening. In these episodes, some liquidity providers withdraw their quotes entirely rather than widening them, and the spread in the affected instrument can temporarily become extremely wide or undefined.

Low-activity sessions. The Asian session in FX and the period between major equity market closes typically carry wider spreads than the London or New York overlap, because fewer market participants are active, competition between liquidity providers is lower, and the order book depth at each price level is thinner.

What This Means for Entry and Exit Costs

The spread is the minimum cost of a round-trip trade. If the spread at entry is 0.5 pips and the spread at exit is also 0.5 pips, the round-trip cost from the spread alone is 1 pip. If one of those transactions falls during a volatile event and the spread at that moment is 4 pips, the round-trip cost becomes 4.5 pips, four and a half times higher than it would be in a normal session.

For a position sized at £10 per pip on EUR/USD, the difference between a 1-pip round-trip cost and a 4.5-pip round-trip cost is £35. On a single trade, that is a moderate additional cost. For a trader who regularly enters or exits positions around high-impact events, those additional costs accumulate into a persistent drag on performance, showing up as underperformance relative to any backtest that assumes normal-session spreads throughout.

This is one of the mechanisms behind the observation in Why Backtesting Results Rarely Hold in Real Trading: backtests that assume a fixed spread at all times systematically underestimate the cost of holding positions during high-volatility windows.

How to Manage Spread Exposure

The spread is unavoidable, but its elevated cost during volatile periods is manageable with straightforward timing discipline.

Check the spread before entering. Most platforms display the current spread on each instrument in real time. Before placing a market order, confirming the current spread level takes seconds and identifies whether the cost of transacting at that moment is within the normal range or significantly elevated.

Time entries away from known high-impact events. If the intended trade does not depend on the release outcome itself, entering the position 30 minutes before or 5 minutes after a major release avoids the window of peak spread widening. The spread normalises quickly. Waiting a few minutes after the initial reaction is often sufficient.

The Bottom Line

Spreads widen during volatile conditions because the risk of providing liquidity rises when prices are moving fast and unpredictably. Market makers compensate for that elevated risk by extracting more revenue from each transaction. The trader pays the cost of that compensation in the form of a wider spread whenever they transact during or immediately around a high-volatility event.

Knowing when spread widening is most likely, which is before and after scheduled data releases, during gap opens, and in low-liquidity session windows, allows the cost to be managed rather than absorbed passively. For the full picture of how this spread widening interacts with slippage and execution quality, The Real Cost of a CFD Trade covers all four cost components in detail.

Darren Clarke is a Senior Trader at Lunaro Financial Services. He has spent 40 years on trading desks ranging from institutional inter-bank FX to retail-focused fintechs and brokerages in the City of London.

Spread betting and CFD trading carry a high level of risk to your capital and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.

Disclaimer:

This material is a marketing communication and is provided for general information and educational purposes only. It does not take into account your personal circumstances, objectives or needs. Any opinions are those of the author at the time of writing and may change without notice. Nothing in this material constitutes (or should be construed as) financial, investment, legal, regulatory or tax advice, or a recommendation to engage in any investment activity. You should not rely on this material when making investment or trading decisions.