[usmannk]

Is selling more liquidity at a tighter spread that much more advantageous than participating in some amount x fewer trades with a looser spread?

In other words, I don't understand if or why it is the case that HFTs would like to, in general, offer tighter spreads than looser ones.

Edit: is it just that volume decreases super linearly in relation to the price of liquidity?

[evanpw]

Market makers sell liquidity, and the spread is the price they sell it at, so they'd prefer to sell at a higher price (larger spread). The reason that spreads tighten is competition: there are a few wholesale market makers, and the brokerages send more of their orders to the MM willing to guarantee the smallest spread. In fact, there's been something of a price war for the last few years, and retail spreads have come way down.