What Is 'Adverse Selection' and How Does It Relate to a Market Maker's Profitability despite a High Fill Rate? ▴ Learn

What Is ‘Adverse Selection’ and How Does It Relate to a Market Maker’s Profitability despite a High Fill Rate?

Adverse selection occurs when a market maker's quotes are consistently executed only when the market is about to move against them, meaning they are trading with better-informed counterparties. A high fill rate in this scenario indicates the market maker is being 'picked off' due to stale or mispriced quotes, leading to losses despite high volume, thus hurting profitability.

How Does Latency Affect a Market Maker’s Effective Fill Rate on an Electronic RFQ System?

What Is the Concept of ‘Adverse Selection’ in Market Making and Slippage?

What Is ‘Adverse Selection’ Risk for a Market Maker?

What Is ‘Adverse Selection’ and How Does It Relate to the Bid-Offer Spread, Separate from Inventory Risk?