Competitive Spread Compression

Competitive spread compression occurs when multiple market makers compete to offer the best price, driving the bid-ask spread toward its minimum possible value. While this benefits retail traders by reducing execution costs, it can also lead to thinner liquidity and increased fragility.

If the spread becomes too narrow to account for risk, market makers may exit the market during periods of volatility. This creates a trade-off between immediate cost efficiency and long-term market resilience.

In highly competitive crypto markets, this phenomenon is a common driver of liquidity provider turnover and venue-specific risk.