What does the bid-ask spread compensate a market maker for?
A market maker quotes bid, offered all day. Naively, every buy-at-bid, sell-at-ask round trip earns cents.
Why isn't this free money? What three costs does the spread have to compensate for?
Show a hint
Think about who trades against a standing quote, what the market maker is left holding between trades, and what it costs just to operate.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.