I noticed that spread on currency pairs shoots up to 5x larger around 22:00 GMT. Then it slowly goes down back to normal levels around 23:00 GMT.
Does anyone know why?
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International banks will pass their trading from one centre to the next, so London hands over to NY, which hands over to Tokyo etc. When a centre takes the reins, they may not want to keep the same position as the previous one; perhaps London was happy being long Euro but NY wants to shift that to be long Yen, or they can't maintain the tight spreads around the Cable prices. So during that initial handover period, the easy thing to do is just widen all the spreads until you've got your system configured and set up the way you want it, then you can bring the spreads in.
22 GMT is 5pm nyc. Thats the time when all the ECNs and liquidity providers stop operation to be restated at 5.30 nyc time again. That's why you see such spreads. Probably starts to widening at 4.30pm since most liquidity providers starts to unload any remaining inventory so they can close the day flat.
A higher than normal spread generally indicates one of two things, high volatility in the market or low liquidity due to out-of-hours trading. Before news events, or during big shock (Brexit, US Elections), spreads can widen greatly. A low spread means there is a small difference between the bid and the ask price. So GMT 22:00 is the NY closing time obviously there low liquidity. Spreads usually remain larger until Tokyo market opens. Hope this answers your question. Cheers Happy Trading.
FOREX is not centralized.
Everyone exchanging money is an active FOREX player so, in effect, it works 24h per day but if you look at an 8-17 workday you get the following chart:
As you can see, there is an overlap between major financial centres except when switching from NY to Sydney where, in effect, one starts exactly when the other one stops. Major firms, from banks to brokers, have decided to use that timeframe to do system maintenance, which generally takes between 15m to half an hour.
That same timeframe is also used for FUTURES, etc maintenance.
So basically every machine will be doing its cleanup during that window.
Do notice that Europe and US summertime do not start at the same time and the industry standard is to do system clean-up & maintenance at 17:00 NYC time.
Thus, from 17:00 to 17:30 NYC time, liquidity will be very small.