Spread Widening
Spread widening is when the bid ask spread increases, often due to falling liquidity, rising uncertainty, or market makers pulling quotes.
Definition
Spread widening occurs when the bid ask spread becomes larger over time.
Common causes
• Liquidity providers cancel or move orders away from the midpoint.
• Uncertainty increases (news risk, event risk, close to resolution).
• Depth falls and the market becomes thinner.
Why it matters
When spreads widen, execution costs rise and fills become less predictable. This often increases effective spread and slippage, especially for market orders.
Common pitfalls
Trading into a widening spread: Costs can increase sharply, turning a good idea into a bad trade.
Using stale assumptions: If you benchmarked costs earlier, they may no longer apply after the spread widens.