Someone has to be willing to sell when you want to buy, at a price you can see before you commit. That role is played by market makers, and their economics determine what your execution costs.
The spread is payment for standing ready
A maker quotes a bid below and an offer above the price it believes is fair. If both sides trade in equal measure, it earns the difference without taking a view.
That difference compensates for the obligation to trade with whoever arrives, including participants who know something the maker does not.
The spread is therefore priced against the risk of being on the wrong side of an informed trade, not against the cost of executing.
Inventory is the risk that actually bites
Flow is rarely balanced. A maker that keeps buying accumulates a position it did not want and is exposed to the price falling.
To shed it, the maker shifts both quotes lower, making its bid less attractive and its offer more so, encouraging trades that flatten the position.
This is why quotes move without any trade printing. The maker is managing what it already holds rather than expressing an opinion about value.
Volatility widens spreads mechanically
The longer a position is likely to be held and the further prices can move while holding it, the more the maker must charge for accepting it.
Rising volatility increases both, so spreads widen and quoted sizes shrink at exactly the moment traders most want to transact.
This is not withdrawal of service so much as repricing, though the practical effect on someone trying to exit is the same.
Adverse selection sets the floor
Some counterparties trade because they know a price is stale. Every fill against them is a loss, and the maker cannot tell in advance which fills those are.
The spread must be wide enough that profits from uninformed flow exceed losses to informed flow. Venues with more informed participants therefore carry wider spreads.
Makers also reduce this by updating quotes as fast as possible, which is why latency matters so much to the business.
On-chain making faces a harder version
A liquidity pool cannot cancel a quote when the price moves. It sits at its curve and gets traded against by arbitrageurs restoring alignment with other venues.
The resulting loss is systematic rather than occasional, and fee income has to exceed it for providing liquidity to make sense.
Designs that shorten the window between price moves and repricing exist precisely because that window is where the value leaks.