It might help if you consider a worked example. Say you had a market for EURGBP which only updated once a second and every second the price moved an average of 10 pips.
Now if you're a market maker it's very risky for you to offer a spread below 10pips because if the market moves by 10pips you're suddenly off-market and someone can arbitrage you by buying from you and selling on the market (taking a risk-free profit and pushing the loss onto you).
Now consider if the market was updating every 100ms and the price of EURGBP only moved by an average of 1pip every 100ms, it means you as a market maker can offer a 5 pip spread comfortable in the knowledge you can pull your price before an arbitrage situation occurs.
This lower spread you're offering is now available to your customers (who are likely to be other financial firms, big companies, and retail FX brokers). Because the retail FX brokers are getting a better spread they can offer a tighter spread to their retail customers.
This isn't just theoretical, FX spreads for retail customers (like folks going abroad or importing goods) are a lot tighter now than they were even a few years ago primarily because of faster trading.
Now if you're a market maker it's very risky for you to offer a spread below 10pips because if the market moves by 10pips you're suddenly off-market and someone can arbitrage you by buying from you and selling on the market (taking a risk-free profit and pushing the loss onto you).
Now consider if the market was updating every 100ms and the price of EURGBP only moved by an average of 1pip every 100ms, it means you as a market maker can offer a 5 pip spread comfortable in the knowledge you can pull your price before an arbitrage situation occurs.
This lower spread you're offering is now available to your customers (who are likely to be other financial firms, big companies, and retail FX brokers). Because the retail FX brokers are getting a better spread they can offer a tighter spread to their retail customers.
This isn't just theoretical, FX spreads for retail customers (like folks going abroad or importing goods) are a lot tighter now than they were even a few years ago primarily because of faster trading.