How Does the Depth of the Order Book Relate to the Bid-Ask Spread?

The depth of the order book is inversely related to the bid-ask spread. A deeper order book, meaning there are large quantities of buy and sell orders close to the best bid and ask prices, indicates high liquidity.

This high liquidity allows market makers to offer a narrower spread because they can execute their hedges with less risk of slippage or market impact.