Why do spreads widen during market openings or volatile events?

In a perfect trading world, the gap between the Bid (buy) and Ask (sell) price is razor-thin. However, during the market open or significant "shaking" events (like economic data releases or geopolitical news), you’ll often see this gap—the spread—expand significantly.

Here is a breakdown of why this happens and what it means for your trades.

1. The Search for "True" Price (Price Discovery)

When the market first opens, it is reacting to all the news, data, and sentiment that accumulated while the exchange was closed.

• The Chaos: There is often a massive influx of orders hitting the books all at once.


• The Result: Market makers and liquidity providers aren't immediately sure where the "fair" price is. To protect themselves from being on the wrong side of a fast-moving price swing, they widen the spread until the market stabilizes and a clear price direction emerges.

2. Reduced Liquidity

Liquidity refers to how easily you can buy or sell an asset without affecting its price. During high-stress events, liquidity often "dries up".

• Risk Aversion: Many institutional traders and automated algorithms temporarily pull their orders from the book to avoid extreme "slippage" or unpredictable losses.


• The Gap: With fewer participants willing to take the other side of a trade, the distance between the remaining buy and sell orders grows.

3. Increased Volatility and Risk Premium

Think of the spread as a risk premium collected by the liquidity provider.

• Higher Danger: In a "shaking" market, the price can jump (gap) several percentage points in seconds.


• Compensation: If a market maker buys an asset from you, they take on the risk of the price crashing before they can sell it to someone else. To compensate for this heightened danger, they demand a higher "fee," which manifests as a wider spread.

4. Order Imbalances

During major news events, the market often becomes "one-sided." For example, if a company reports disastrous earnings, everyone wants to sell and almost no one wants to buy.

• To entice buyers to step into a falling market, the spread widens as the Bid price drops much faster than the Ask.