Why Are Spreads High at Night

Why are spreads high at night, or what is the reason behind spreads widening at night? The forex market in the financial world operates 24 hours during five days of the week because it’s a global market and different time zones result in overlapping of major financial markets. Traders have often noticed that spreads, the difference between the bid and ask price, tend to widen at night. Spreads, whether narrow or wide, can have a significant impact on trading strategies, outcomes, and costs. In this article, we will explore the reasons behind “Why are spreads high at night?” along with the factors that affect it, and whether it is better to trade during the day or night. 

 

What Time Do Forex Spreads Widen?

 

There are several times spreads can widen in forex, but there are a few common periods in which spreads widening in forex is deemed to happen. For example, the Sydney session opens at 10 PM (GMT), and usually, as the market adjusts to new orders, the spreads, on the other hand, tend to be wide. Similarly, before the New York session closes at 9 PM (GMT), spreads may widen as most institutional traders wind down their positions. 

There is also the Asian session, which is generally less liquid than the London or New York sessions, leading to naturally wider spreads, particularly for non-Asian currency pairs.

Additionally, central bank announcements can impact spreads. For example, spreads may widen before or immediately after the news release. 

Spreads also widen during the rollover period, when forex brokers apply swap rates, leading to lower liquidity and higher spreads. During holidays and weekends, markets are closed. However, some brokers offer limited trading with extremely high spreads. 

 

Reasons for Increased Spreads During Night Hours in the Forex Market?

 

One of the primary reasons for the spread increasing at night is the reduction of market liquidity. In simpler words, liquidity refers to the ease with which assets can be bought or sold without causing a significant change in price. When major financial centers such as London, New York, and Tokyo are active, it is considered for the market to be in its peak trading hours. This leads to a high volume of buy and sell orders. Conversely, at night, few traders are active, especially after the New York session is closed. 

For example, between 8 PM and 12 AM GMT, most of the major trading hubs are closed, and only the Sydney session is active. Since fewer participants are trading, it becomes harder for brokers to match buy and sell orders, leading to wider spreads. 

Additionally, at the end of each trading day (usually 10 PM GMT), forex brokers apply swap rates on open positions, while many traders avoid holding positions during this time due to the rollover fees,  the spreads may widen because of the temporary drop in liquidity. 

 

What Affects Forex Spreads? 

 

Several factors influence forex spreads, but one of the main reasons that can shape the difference between the bid and ask prices is market liquidity. Simply meaning the higher the liquidity, the tighter the spread. For example, pairs like EUR/USD usually have low spreads because they are highly traded, and on the other hand, exotic pairs like USD/ZAR have lower liquidity, which leads to wider spreads.     

The type of broker a trader chooses can also have a massive impact on the spreads. For example, Market Maker Brokers set their own spreads, which can often be wider than the raw interbank spreads. ECN brokers either offer the raw spreads with commissions or tighter spreads with a bit of markup on them.

Other various factors can affect forex spreads as well, including economic events, trading time of the day, market volatility, or currency pair characteristics. Traders should understand these impacts and build strategies that are suitable for them. 

 

Is It Better to Trade at Night or During the Day? 

 

The only way to determine whether it is better to trade during night day or can be done through a trader’s strategy and risk tolerance. Here are some considerations: 

Trading during the day is mostly preferred by scalpers and day traders because of the higher liquidity of the London and New York sessions, since they have the most trading activities. This also means more buyers and sellers are currently trading in the market, resulting in competitive pricing and tighter spreads. Since more institutional traders are active during the day, orders are filled quickly, although traders should keep in mind that these sharp price moves can stop-out trades quickly. 

Trading at night is usually preferred by traders who use the swing trading strategy or position trading. Trading at night means less competition, fewer traders are active, so there are slower price movements. In this period, market conditions are more stable outside major sessions, and there are favorable opportunities if trading JPY, AUD, or NZD pairs.