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What Is the Impact of High Market Volatility on an LP’s Willingness to Provide Firm Quotes?

High volatility increases adverse selection and hedging risk, causing LPs to widen quotes or reduce the size and firmness of their commitment.
Greeks.Live15.11.25

What Is the Impact of High Market Volatility on an LP’s Willingness to Provide Firm Quotes?

High volatility significantly increases the risk for the Liquidity Provider (LP) because the price of the underlying asset can move dramatically between the time they quote and the time they execute their hedge. This increases the potential for adverse selection and hedging losses.

Consequently, LPs will either widen their quotes substantially or reduce the size and firmness of the quotes they provide.

What Is the Concept of “Firmness” in a Quoted Price on an RFQ Platform?
How Do ‘Indicative Quotes’ Differ from ‘Firm Quotes’ in an RFQ System?
What Is the ‘Realized Spread’ and How Is It Used to Estimate the Adverse Selection Cost Component?
What Is ‘Adverse Selection’ and How Does It Relate to a Market Maker’s Profitability despite a High Fill Rate?

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