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Difficulty: Hard
Category: Market Microstructure
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Topics: market-microstructure, glosten-milgrom, informed-trading, information-asymmetry
In the Glosten-Milgrom model, a market maker sets bid and ask prices for a stock, facing a continuous stream of buy and sell orders. Some traders possess private information about the stock's true value ('informed traders'), while others trade for liquidity reasons ('uninformed traders'). Assuming the market maker sets prices to break even on average, what fundamental asymmetry drives the existence of the bid-ask spread in this model?
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