hard · Volume Profile Analysis
According to the Glosten-Milgrom model, why do market makers maintain a bid-ask spread even when they are risk-neutral and operate in a competitive environment with zero expected profit?
- To match the 'ATR' volatility and prevent being stopped out of their own positions.
- To cover the expected losses incurred from trading against informed participants (adverse selection).
- To ensure they capture the 'rebate' from the exchange on every trade.
- To discourage high-frequency algorithms from 'front-running' their limit orders.
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