Is it true that in foreign exchange markets, dealer spreads are lower for smaller order and increases for larger orders? This seems counter-intuitive when compared to other markets where dealer spreads would decrease for larger orders due to efficiencies of scale.
Yes, and no. First large orders often get smaller spreads than small orders, because of efficiency gains for the market-maker. However, large orders also tend to have larger spreads. The reason for this is that large orders may contain additional information about the future price which is at the expense of the market-maker in the interdealer market. But some dealers like to attract such kind of orders and information, thus offering lower spreads (to some of their clients).