Why do spreads become so large when news is released?

I'm sorry if this has been asked/answered before, but the search function on this forum blows.

This has been bugging me lately. Why do the spreads on currencies get so wide when news is released? I would assume that at times of a news release the currency experiences greater volume. In the stock world when a stock has an increase in volume the spread shrinks. At times there can even be a few seconds where the bid is higher than the ask if MM's can't keep up.

Why is that reversed in forex?

I think you will enjoy this article

http://www.forexfactory.com/showthread.php?t=7484

Stock market:
Participants can add their own bid/ask prices through the brokers.

Forex market:
Brokers add their own bid/ask prices, widen and manipulate with them as much as they want (most of them).

OK answer to your question, so that you have a less chances to make any cash during the news announcements.

What the heck did you expect then?

Haven't read the article yet, but, if the brokers were worried about you making money then why would they let you trade at all? Why is trading around the news any different? So long as the bid is lower than the ask they are making money when there is someone buying and selling at that moment.

Since news typically have more volume then there is more likely a chance there will always be someone buying and someone selling at that moment. Perhaps someone is on the wrong side of the news and needs to correct their position. Or perhaps someone is predicting a reversal since news plays don't mean 1000 pip movements. Or perhaps someone is using an EA that was automatically tripped, and therefore screwing the trader.

Its no different in stocks. Good news comes out and bulls fight bears. Who wins the fight? The MM's don't care. They have their shares for sale at the ask and buying at the bid. MM's control their spreads as well. They do follow the market demand however, just as I expect forex brokers do in that they're not going to show a price 200 pips above what other brokers are showing.

read the article, I think you will have a much better understanding

Some parts of the article I find contradicting to why spreads widen during high volume news releases.

"Using this information, if a market sell order was placed for 38.4mil, the spread would instantly widen from 2.5 pips to 4.5 pips because there would no longer be any orders between 1.56300 and 1.56345. No broker, market maker, bank, or thief in the night widened the spread; it was the natural byproduct of the order that was placed. If no additional orders entered the market, the spread would remain this large forever. Fortunately, someone somewhere will deem a price point between those 2 figures an appropriate opportunity to do something and place an order. That order will either consume more interest or add to it, depending whether it is a market or limit order respectively."

and

"A more interesting question is, what would happen if all the listed orders where suddenly canceled? The spread would widen to a point at which there were existing bids and offers. That may be 5,7,9, or even 100 pips; it is going to widen to whatever the difference between a bid and an offer are. Notice that nobody came in and “set” the spread, they just refused to transact at anything between it."

Basically the two paragraphs are saying that if a large order came in and bought/sold all the positions at those levels the spread would widen. With no one else coming into the market the spread would remain stagnant. That doesn't happen during news plays though. Lots of people are coming into the market. There are plenty of people willing to take up more positions within the spread and push it one way.

"Leading up to an economic report for example, certain traders will enter into positions expecting the news to go a certain way. As the event becomes immanent, the banks on the Interbank will remove their speculative orders for fear of taking unnecessary losses. Technical traders will pull their orders as well since it is common practice for them to avoid the news. Hedge funds and other macro traders are either already positioned or waiting until after the news hits to make decisions dependent on the result."

I think this is a very presumptuous paragraph. No disrespect to darkstar as I know he's well established here, but he's assuming that all traders, hedge funds, banks, and the like do the same thing. Also, does this not happen in the stock market? Analysts release reports saying Yahoo! is expected to be up 5% profit for this quarter. People buy in to it, the report comes out and what happens? Even if they hit their 5% mark the price could still fall. Ever heard the advice, "buy on rumor, sell on news?"

Also, the article clearly states, " it isn’t hard to understand how insignificant the speculative presence is." So then why is the speculative presence dictating the spread? If all ECN's had to do all day was offer the service of providing a spread to exchange currencies then they don't care. Also, with the speculative presence out of the market it shouldn't matter since there is still much more significant trading going on that is speculative. The spread should remain tight.

"Retail forex is almost akin to running a casino. The majority of its participants have zero understanding how to trade effectively and as a result are consistent losers. The spread system combined with a standard probability distribution of returns gives the broker a built in house advantage of a few percentage points. As a result, they have all built internal order matching systems that play one loser off against a winner and collect the spread. On the occasions when disequilibrium exists within the internal order book, the broker hedges any exposure with their tier 2 liquidity provider."

I read this as yet another paragraph explaining why brokers don't care what the price does since they have the probability on their side.

"With the technical traders on the sidelines, who is going to be stupid enough to take the other side of all these orders?

The answer is no one. Between 1 and 5 seconds after the news hits it is a purely a 1 way market. That big long pin bar that occurs is a grand total of 2 prices; the one before the news hit and the one after. The 10, 20, or 30 pips between them is called a gap."

What about the majority of the market that isn't there to speculate and is just there to get business done? Boeing may be fighting an uphill battle if they need to pay their workers in yen and the dollar is falling, but they still have to pay their workers in yen.

I didn't find the article very convincing. I'm sorry.

* They let us trade, because we are mostly wrong (losing money) anyway

lol ok best of luck anyway

Not going to address my points?

Lol, you need a lot of reading http://www.amazon.com/Trading-Exchan.../dp/0195144708

Why would I bother reading that when I read what was already recommended to me and found it unconvincing? All you have to do is address the points I've already made. That's why I'm here on a forum, to talk with people; not get book suggestions.

i had my lesson.
last friday and today!!!
pay for the lessons!
i will nv do any news trade anymore..

The first thing I would suggest you do is to find out what the difference is between brokers and market makers. They operate under very different conditions. I think once you understand that, what happens on FX as vs stocks will become pretty understandable, but if you don't understand how the different markets work, there's no reason to spend an hour typing a response.

Why all this hostility, help a brother out... lol

Basically it's like this: In forex, vast majority of brokers are market makers. Even the ones that say they are not, usually are. The very same majority of brokers have realised, that since 95% of traders loose money, they can make much more money, by trading against the traders, rather than making the spread. Widening of the spreads during the news has 2 major reasons:
1) Higher spreads means more s/l are hit = more profit for the broker
2) A lot of borkers have slow price feeds and people were able to exploit during the news and hence, simply put, steal some money back from the brokers, in order to prevent this, brokers have started to increase their spreads, slow down the exectuion during the news, etc..

Best of luck,

Vlad

Friend the question that you have asked regarding spreads that is different in stock market and forex market. In forex the spread increases becasue in forex the worldwide news is considered. If in any country its economical news is declared it all depends on the worldwide economy and the national and internation banks. That is wy the spreads in forex increases. And in stock market the news we get is about the production and working of that particular company that is wy the spread in stocks shrinks.

Hi,

Brokers have no sinister intentions when they widen their spreads - if they do.
I used to work with different retail brokerages before prop-trading and now work with ECN based order entry platforms - which are much worse in terms of widening spreads. (40 to 60 pips on cable during news no problem)

The spreads do not widen to the same extend at every news release either - much depends on intraday volatility, time of news release, liquidity, etc.

Some of the brokers who keep spreads steady, do so at THEIR risk. The ECN's work on the basis that every bank contributing directly to the network put the best bids/offers into the system on an automatic basis to keep it liquid. If I am a trader, or a bank, or even a broker for that matter and big news is about to be released in an already volatile climate, I wouldn't want to be hit on my price on the wrong side. So what happens is that seconds before news comes out the banks (mainly) are pulling their bids and offers - for the same reason you put a trade on: you both want to profit; you by exploiting a possible ultra fast move after the news, they by NOT getting lifted on their offers or hit on their bids on what could turn out to be the wrong side of the market for them.

But don't despair: if you have an opinion where the market should go, you can put your order on before the news comes out - like many people used to do and still do. You'll have to forget about tight stops for that though, that's all. Why should market makers have a bigger risk at those times than the retail traders?

regards
daytrading