What Is the Relationship between the Bid-Offer Spread and the ‘Cost of Immediacy’ in Derivatives Trading?

The bid-offer spread is essentially the 'cost of immediacy' paid by a trader who demands immediate execution. When a trader uses a market order, they are paying the spread to the liquidity provider (market maker) for the service of executing the trade instantly.

The wider the spread, the higher the cost of immediate transaction for the liquidity taker. The spread compensates the market maker for the risks they take to provide this service.