How Market Makers Handle Bid-Ask Spreads During Volatile Periods
Market makers sit at the centre of every functioning exchange, continuously quoting prices at which they are willing to buy and sell an asset. The difference between those two quotes, the bid and the ask, forms the spread, which is essentially the cost of immediate execution and a signal of how liquid a market truly is. When calm prevails, those spreads often tighten to fractions of a cent on heavily traded instruments, allowing traders in Sydney and Melbourne to enter and exit positions with minimal friction.
When volatility spikes, the picture changes quickly. A surprise interest rate decision, a flash crash in digital assets, or a sudden geopolitical headline can pull liquidity providers to the sidelines, leaving the bid-ask gap wide enough to punish impatient orders. Understanding how professional market makers respond to those moments helps retail traders in Australia anticipate cost-of-trade shifts rather than be blindsided by them.
Australian investors encounter this dynamic across multiple venues. The ASX hosts one of the most concentrated liquidity pools in the Asia-Pacific region, while local brokers increasingly route orders into offshore crypto exchanges and CFD providers. ASIC has repeatedly warned that spread widening during volatile sessions is a normal market feature rather than malpractice, but the agency's guidance still pushes brokers toward transparent execution disclosures.
This article unpacks the mechanics behind market making under stress, compares spread behaviour across calm and chaotic sessions, and connects those mechanics to the realities Australian traders face on platforms ranging from the Sydney Futures Exchange to offshore retail brokers serving clients from Perth to Brisbane.
What Market Makers Actually Do in the Spread Equation
A market maker's job is to remain on both sides of the book at all times, earning the spread rather than directional profits on each trade. To do this safely, they must manage inventory risk: if too many sellers hit their bids, they accumulate a long position that could move against them, so they widen their offers to slow the flow. The wider the spread, the more breathing room they have to offload that inventory later without realising a loss.
Inventory models built by firms such as Optiver, Susquehanna, and Jane Street, several of which maintain significant operations in Sydney, adjust quote sizes and skew in real time. When volatility rises, the same models reduce quoted size, lift the bid-ask distance, and sometimes withdraw one side of the book entirely for short windows. Retail traders see this as the spread jumping from 1 pip to 8 or 10 pips on AUD/USD during a Reserve Bank of Australia announcement.
Spreads are also a function of competition. On the ASX, designated market makers for single-stock options have contractual obligations that keep spreads inside defined tolerances even when broader markets wobble. In less regulated venues, particularly offshore crypto platforms used by Australian retail clients, those obligations are looser, and spreads can balloon during the same event.
How Volatility Reshapes Liquidity Provision
Volatility does not destroy liquidity on its own; it changes how risk is priced. When the realised range of an asset jumps, the probability of an adverse price move against an open inventory rises, so market makers demand compensation. That compensation appears as wider quotes and smaller displayed size, a behaviour sometimes called quote fading.
A second force is correlated order flow. During a sell-off in US tech shares that ripples into Asian hours, market makers in Sydney face a torrent of one-sided sell orders on local tech names such as Xero, Wisetech, and Block. Because the flow is correlated, hedging becomes expensive, and the cost is passed through the spread. The same dynamic plays out in crypto when a leveraged long flush cascades across perpetual swap venues.
A third, often overlooked, factor is technological. Latency-sensitive firms race to cancel and replace quotes milliseconds before retail orders arrive, a practice that benefits from colocation near exchange matching engines. Australian-based high-frequency participants colocate in Sydney, while offshore crypto exchanges rely on cloud-based matching that introduces its own micro-delays, sometimes widening effective spreads for users connecting from Brisbane or Perth.
Comparing Spread Behaviour Across Market Conditions
The pattern below illustrates how a typical liquid asset's bid-ask spread behaves across different volatility regimes. The figures are illustrative rather than real-time but reflect the pattern observed across ASX blue chips, major FX pairs, and large-cap crypto assets.
| Condition | Typical Spread (relative) | Quoted Size | Market Maker Posture |
|---|---|---|---|
| Calm session, normal hours | Very tight (1x baseline) | Full displayed size | Aggressive quoting, tight inventory limits |
| Scheduled event (RBA, US CPI) | 2x to 4x wider | Reduced | Defensive skew, partial withdrawal |
| Flash crash or news shock | 5x to 15x wider | Minimal or hidden | One-sided quotes, hedging via correlated instruments |
| Post-event stabilisation | Returns toward 2x to 3x wider | Rebuilding | Re-entering the book cautiously |
| Overnight Asian session | Slightly wider than baseline | Moderate | Lower competition, fewer participants |
Spreads rarely return to baseline immediately after a shock; they ease back gradually as market makers regain confidence in inventory absorption. Traders who recognise this staircase pattern can time entries more patiently rather than chasing fills during the widest part of the curve.
Regulatory Oversight in Australia and What It Means for Spreads
ASIC's market integrity rules and the Corporations Act set minimum standards for quote transparency on licensed venues. For retail traders using AFSL-registered brokers, this means best-execution obligations and disclosure of average spread data during volatile periods. Brokers that route to offshore prime brokers must still reconcile execution quality against these Australian standards.
Crypto sits in a different regulatory zone. Following reforms around digital asset platforms, several offshore exchanges serving Australian users have begun voluntary registration, but enforcement of execution quality remains lighter than on the ASX. Traders evaluating offshore venues can lean on a guide to evaluating crypto tokens with real products to spot platforms that operate with genuine liquidity infrastructure rather than thin internal books that exaggerate spreads under stress.
ASIC has also flagged the risks of CFD and spread-bet products during volatile sessions, where retail traders sometimes confuse a widened spread with a manipulated quote. Education pieces that clarify the difference between market-driven spread expansion and broker-driven slippage are central to the regulator's consumer-protection agenda, and they align closely with the principles of informed participation that platforms like Granimator emphasise.
Practical Lessons for Traders During Unstable Periods
Traders cannot eliminate spread costs, but they can control how much those costs hurt their performance. The following habits help Australian retail participants navigate periods when market makers step back.
- Reduce position size during scheduled macro events, since wider spreads amplify the impact of every entry and exit.
- Use limit orders away from the touch on calmer sessions, and accept market orders only when the spread is confirmed tight.
- Diversify execution venues rather than concentrating flow on a single broker, especially when trading instruments that cross between ASX and offshore liquidity pools.
- Apply stop losses calibrated to volatility rather than fixed percentages, so stops are not triggered by routine spread widening.
- When trading crypto derivatives, study the difference between Bitcoin futures and spot execution, because funding flows and basis shifts can keep spreads wider for longer than in traditional markets.
- Track average spread behaviour on preferred instruments across a calendar quarter, and flag any venue where spreads diverge sharply from peers.
- Keep a trading journal that records the spread at the moment of execution, which later reveals whether costs ate into returns more during volatile weeks.
Spreads are the price of immediacy, and during rough patches that price rises sharply because market makers must protect themselves from one-sided flow. Recognising that widening spreads are a rational response to risk, rather than a sign of dysfunction, reframes volatile sessions as periods where patience, sizing discipline, and venue selection matter more than picking direction.