Why do Pip Spreads vary between currency pairs?

I have noticed that some pairs have wider spreads than other for example GBPUSD, USDJPY,USDCHF and EURUSD generally have 4-5 pip spreads.

What i dont understand is why do pairs such as
1. GBPAUD, GBPCHF have a 15 pip spread
2. AUDCAD have a 10 pip spread.

Is there a rational explanation for this, for example some pairs are less volatile and as a result the broker charges a larger spread to make more money. But should that be the reason would that not discourage traders from trading that pair.

I really want to understand this, can any one help?

once upon a time i hear that it is because the volatility and trading volume....
the bank has to buy contract (the one that divided into lot ) .....
(so if the contract needs plenty of time to be used up , the change of price may be considered?)
and data connection in between?

D,

Simply it put, it has to do with liquidity. The more interested buyers and sellers are in a particular rate, the tighter the spread will become. Of course, some of that spread also has to do with a markup your retail broker will put on the actual market spread, but spreads are generally the result of an abundance or lack of liquidity.

For example, with the EUR/USD, this is the most traded pair, hence it has the lowest spread, and also the reason why retail brokers don't feel the need to mark it up as much, since their risk of getting a worse price is low when they have to provide their own liquidity.

On the other hand, lower liquidity pairs like the GBP/CHF or a few other GBP crosses, will have fewer buyers and sellers, and thus a higher market spread as well as a higher inherent risk for your retail broker. That risk comes with a premium on the spread, which is why retail brokers tend to charge a higher spread on those crosses.

So, for example in a highly liquid spot rate, you may start with a buyer who wants to buy the EUR/USD at 1.3500, but the lowest seller wants 1.3503. Well, if the EUR news is favorable, you'll have a buyer raise his target price to 1.3501 or 1.3502 or even 1.35025...this is the kind of action that shrinks the spread.

On a low liquidity pair, you may start with the same buyers/sellers, but you may not get those few extra competitors to try and bump the price around and thus, tighten the spread.

Hope this helps.

I think I almost understand why they are different but I still do not understand why banks and brokers wider spreads.

Can anyone please explain more in a simple way?

Banks do not widden the spread, it's a market where some sellers are ready to sell at a given price and some buyer are ready to buy at a given price.

Imagine the following situation :

You have company A, B, C and D.

Company A send to their bank a request to buy €$ @ 1.4610
Company B send to their bank a request to sell €$ @ 1.4610
Company C send to their bank a request to buy €$ @ 1.4600
Company D send to their bank a request to sell €$ @ 1.4620

Company A and B match, the order is processed. Company C D do not match, they stay on the market as pending untill another company is ready to buy/sell at the given price, the spread widen to 20 pips (this is of course just to get the idea as i've never seen a 20 pips spread on €$ ^^ )

If there is only a few buyer seller at a given time, the spread usually widden naturally as bid and ask will not match.

OK, now I understand how interbank rates work.

What about during news announcements? Why spreads are widened? I know brokers increase spreads but what about at the banks side, do they increase interbank spreads or it really less buyers and sellers at news time?

I know from some website that during news time, fx personel at banks increase spreads to manage risk, in other words, to increase prices to reduce buying and selling activity. It is to limit banks net exposure. Is that right?

on every pair imho. Remember how many years equities traded in fractions and the lowest spread you could get was 6-1/4 cents a share. This went on for over 100 years till "someone" decided to fractionalize spreads and all of a sudden spreads now average a penny for high volume stocks on the nazdaq and NYSE. And guess what? Volume went thru the roof. I believe we will see a day when we never have more than a 1 pip spread on any pair and the euro/usd will trade for 1/2 pip or less. The smart bigger retail traderd know you cant scalp and survive in this 3-5 pip avg environment and some traders just refuse to pay a 3 pip spread and never get involved with forex. To me, if there are pairs that cant be traded with a 1 pip spread, they shouldnt be on any brokers trading list. Period! One day soon we will all feel like suckers for ever paying these rediculous spreads. Think 2 pips is fair? Add it up at the end of the year! I will never play any pair with more than 4 pip spread and only when the play looks fantastic and Im likely to hold for at least a 100 pip gain or more.