Question
What will be the impact on the Bid-Ask Spread when
liquidity in the forex market increases?Solution
Bid-Ask spread means the amount by which the ask price (what sellers asks for) exceeds the bid price (what buyer wants to pay) for an Asset in market. Ask price is the value point at which the seller is ready to sell and bid price is the point at which a buyer is ready to buy. When the two value points match in a marketplace, i.e. when a buyer and a seller agree to the prices being offered by each other, a trade takes place. These prices are determined by two market forces -- demand and supply, and the gap between these two forces defines the spread between buy-sell prices. Liquidity has an inverse relationship with Bid-Ask spread because when the forex is readily available in the market there will be less difference between highest price buyer willing to pay and lowest price seller willing to accept.
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