easy · Market Microstructure adverse-selection
In the Glosten-Milgrom model, why does a bid-ask spread exist even if there are no transaction fees?
- To ensure that prices never change too rapidly.
- Because dealers are naturally risk-seeking and want to gamble against the market.
- To compensate the dealer for the risk of trading with informed participants.
- To cover the electricity and server costs of the exchange.
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