price spread

[fundjunkie]

Hi,
I've noticed that different stocks have differing price spreads - sometimes alarmingly large. Can someone explain how/why this happens?


Thanx,
D

 

[TheBramble]

Liquidity.

If MMs know they can easily and quickly cover their positions because there is great demand for the stock (liquidity) there will be a low spread.

The lower the liquidity - the wider the spread becomes to cover the MMs potential exposure (of being left long/short stock at the end of the day).

Volatility also has a part to play in the spread (on stocks), but I believe this is secondary to liquidity.