Adverse Selection and Informed Flow
Every market maker faces the possibility that the counterparty knows more. In event contracts the problem is unusually raw, because the subject of the market is a fact about the world, and facts leak: to people in the room, people near the data, people watching the right feed a second earlier. Adverse selection is not an edge case here; it is the central cost of quoting.
Two kinds of counterparty
Flow divides into noise, trading for entertainment, conviction or portfolio reasons unrelated to short-term information, and informed, trading because they know something your centre does not reflect. You profit from the first and lose to the second, and the spread is the premium that balances the two. In the classic dealer-market framing, the maker's zero-profit spread widens exactly as the informed share of flow rises, which yields the working rule: quote width is an estimate of how toxic you believe the flow is right now.
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