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How Is the Risk Taken by a Market Maker Compensated through the Spread?

Market makers face 'inventory risk,' the risk that the price of the asset they hold will move against them before they can offset their position. They also incur operational and technology costs.

The bid-offer spread is their primary source of revenue, acting as compensation for providing liquidity and taking on this risk. A wider spread compensates for higher perceived risk or lower competition.

What Specific Algorithms Are Used to Dynamically Adjust Quotes Based on Inventory Delta?
How Does the Bid-Ask Spread Reflect the Risk Taken by a Principal Desk?
What Is the Difference between an Agency and a Principal OTC Trade Execution Model?
How Do Market Makers Determine the Price They Offer in an RFQ?