Explain adverse selection in market making. Why does it widen spreads?

How to answer

Adverse selection is the risk that the counterparty hitting your quote knows something you don't, so you systematically lose on informed trades. If someone aggressively lifts your ask, the price is more likely to keep rising, leaving you short at a loss. To survive, the maker widens the spread so steady profit from uninformed (liquidity) traders offsets losses to informed ones. It's why spreads blow out right before and after earnings or major news, when the informed share of flow spikes.

Key idea: Confusing adverse selection with general volatility risk. It's specifically about asymmetric information, not just price moving around.