What Is a “Pricing Spread” in Market Making, and How Is It Determined?

The pricing spread, or bid-ask spread, is the difference between the highest price a market maker is willing to pay (bid) and the lowest price they are willing to accept (ask). It represents the market maker's compensation for providing liquidity and taking on risk.

The spread is determined by factors including the volatility of the underlying asset, the cost of hedging, inventory risk, the competitive landscape, and the desired profitability margin. Tighter spreads indicate a more competitive quote.