Every quoted stock has two prices: one at which you can sell immediately and a slightly higher one at which you can buy. The gap is not arbitrary.
The spread is the price of immediacy
A market maker stands ready to take the other side of a trade at any moment, so a seller does not have to wait for a matching buyer to appear.
That service has value, because waiting carries risk and uncertainty. The spread is what the provider charges for supplying immediate execution on demand.
The firm earns the difference by buying at the bid and selling at the ask repeatedly. Any single round trip is small; the business depends on doing it constantly.
Holding inventory carries risk
Between buying from one participant and selling to another, the market maker owns the shares. If the price moves against that position, the loss can exceed the spread earned.
The longer a position must be held before it can be offloaded, the greater that exposure. Thinly traded securities therefore require wider quotes to compensate.
Volatility works the same way. A security whose price swings widely can move far during the seconds or minutes a position is held, which pushes the quoted gap wider.
Some counterparties know more than the quote does
Most incoming orders come from participants with no particular information. A minority come from those acting on knowledge the quote has not yet reflected.
A market maker cannot tell them apart in advance, and consistently trading against informed flow produces losses. The spread has to cover that expected cost across all trades.
This is why quotes widen dramatically around scheduled announcements and unscheduled news. The probability that any given order carries information rises sharply at those moments.
Volume and competition push the other way
High turnover means inventory can be cleared quickly, which reduces the exposure that has to be priced in. Heavily traded shares carry the narrowest quotes for this reason.
Competition compresses spreads further. Where several firms quote the same security, each has an incentive to improve slightly on the others to attract order flow.
The result is a spread of a cent or less in the most active names and several cents or more in securities that trade only occasionally.
Why spreads widen at the open and under stress
At the start of a session, overnight news has not yet been absorbed and the balance of buyers and sellers is unclear. Uncertainty about the fair price is at its highest.
In periods of market stress, prices move faster than positions can be cleared, and the risk of trading against informed flow rises at the same time.
Quotes widen in response, and the cost of trading rises exactly when many participants most want to transact. This is a feature of the pricing mechanism rather than a malfunction.