For Financial Assets Traded with Market Makers, the Most Relevant

Essay

For financial assets traded with market makers, the most relevant component of round-trip cost is the bid-ask spread. The spread charged by a market maker varies sharply from one financial asset to another, reflecting primarily the amount of risk the market maker is assuming by "making" a market. This market-making risk can be related to two main forces. Describe these two forces or determinants of this risk.