What does it mean to "earn the spread"?

Question

You quote 99.90 bid / 100.10 ask in a stock you think is worth 100.00. One customer sells you 1{,}000 shares at your bid; a little later another customer buys 1{,}000 shares at your ask. How much did you make, and what silently had to hold for that number to be real?

Accepted Answer

The mechanical profit. You bought 1{,}000 shares at 99.90 and sold 1{,}000 at 100.10: (100.10 - 99.90) 	imes 1{,}000 = 0.20 	imes 1{,}000 = \200. You captured the full 20-cent spread on 1{,}000 shares. Notice you never had a view that the stock would go up or down, you were flat at the start and flat at the end. Your profit came purely from providing liquidity to two impatient counterparties. What had to hold. That clean \200 assumes two things: - Both legs fill near your fair value. Between the buy and the sell, if fair value had jumped to 100.30, your 100.10 sale would have been a giveawa…

What does it mean to "earn the spread"?

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