Hi folks,

With bid and ask prices, what is really driving the differences and how do they fluctuate compared to each other as a currency pair moves?

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[Christian HarrisParticipant]

Bid and ask prices are determined by the balance of supply and demand, the actions of market participants, the presence of market makers, and the overall liquidity and volatility of the market.

Highly liquid markets, with many buyers and sellers, tend to have narrower bid-ask spreads because there is less risk and more competition among market participants.

In contrast, in illiquid or highly volatile markets, bid-ask spreads can widen due to the increased risk and uncertainty buyers and sellers face.

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[SteadyTradingEd]

Thanks for the explanation!

Please could you elaborate on how market makers influence bid-ask spreads?

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[Christian HarrisParticipant]

Market makers are key players in determining the bid-ask spread, the difference between buying and selling prices.

They provide liquidity by consistently quoting both prices, narrowing the spread through competition in active markets.

However, they also adjust the spread based on their inventory, widening it to discourage buying when overstocked, or narrowing it to attract sellers.

Market volatility and uncertainty often lead to wider spreads as market makers protect themselves from potential losses.

The level of competition among market makers also impacts the spread, with more competition typically resulting in tighter spreads.

Ultimately, market makers balance profit with their role in ensuring smooth market functioning.

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[SteadyTradingEd]

Great. Thanks again for explaining!

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[James BarraModerator DayTrading.com Team]

Hi SteadyTradingEd,

You can find more information about how spreads work here. We’ve also collated our pick of the top brokers with low spreads.

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