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What Is the Concept of ‘Liquidity Premium’ and How Does It Factor into Quote Size Decisions?

Liquidity premium is extra compensation for providing large or illiquid size, factored into the spread for bigger quotes.
Greeks.Live14.11.25

What Is the Concept of ‘Liquidity Premium’ and How Does It Factor into Quote Size Decisions?

Liquidity premium is the extra compensation a market maker demands for providing liquidity, especially for larger sizes or illiquid contracts. When deciding on quote size, the market maker increases the premium (widens the spread) for larger sizes to cover the increased risk of holding a large, difficult-to-hedge position.

This premium is factored into the pricing for the larger quote size.

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

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