I agree with your your explanation and it's what I was getting at. The tight spreads on bucketshops are usually only available a a very minimum volume. If you trade more than that you get slipped to the next price down. The tighter the spreads that are offered the worse this becomes.
That's a completely different issue, Pete. Choccy stated that a broker just adds their margin to the institutional quote and he's been on about impact the FX retail trader has on the actual market. If that was the case then the underlying quotes would have to have slipped too which is where the whole regulatory issue with FX quoting that I was alluding to comes into play... unless of course you believe that bookies can in/directly move the market with individual client orders.
The bookie quotes change/slip you cos you're being ripped off and they want to match as many orders as possible in-house to manage their own net exposure. It's got absolutely f*ck all to do with the underlying market where there's strict legislation on your bid/offer and spread and the whole ECN thing adds another degree of complexity to attempting to game people.
Insofar as spread betting firms are concerned then yes, liquidity is an issue (or rather is it how they deal with their counter-pary risk?) but in wholesale FX? Not a chance. They two things are worlds apart. The fact that most FX activity doesn't take place in the spot market is another issue that's been completely overlooked too.