Adverse selection
TheoryDefinition
Information asymmetry where one party in a transaction has more information than the other and exploits it. In insurance: people who know they're sick buy more health insurance. In markets: informed traders trade against uninformed market makers.
Key reason market makers widen spreads in volatile or news-driven periods — they're protecting against adverse selection by traders who know more.
Key reason market makers widen spreads in volatile or news-driven periods — they're protecting against adverse selection by traders who know more.