Why is a small-cap's spread permanently wide?
A large-cap stock trades a -cent spread all day. A thinly traded small-cap of similar price quotes a persistent -cent spread even in calm markets, with no news pending.
Explain the mechanics. Why does illiquidity translate into a structurally wider spread?
Show a hint
A spread compensates the market maker for three things: order-processing cost, inventory risk, and adverse selection. Ask how thin, infrequent volume changes each one.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.