Adverse selection

Adverse selection is the risk that the counterparty who trades against your resting order knows something you do not. Market makers widen spreads to compensate for it, which is why manufactured signals about direction impose a real cost on them.

market microstructure · updated 2026-11-06

See also

• Market maker — A market maker quotes both a bid and an ask continuously, earning the spread in exchange for supplying immediacy. Market making in…
• Bid-ask spread — The bid-ask spread is the difference between the best bid and the best ask. It is the immediate cost of trading in and straight ba…

Terms that refer here

Bid-ask spread · Market maker

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