Impact of Algorithmic Trading on Market Volatility

Very Hard Equity Market Structure Algorithmic Trading

In the recent years, algorithmic trading has become a cornerstone of market activities, enhancing the efficiency of liquidity provision and the speed of trade execution. A prominent trading firm, AlphaQuant, has implemented a sophisticated algorithm that utilizes machine learning techniques to predict market movements and execute trades across various equity markets. This algorithm reacts to historical price data, trading volume, and market sentiment indicators within milliseconds. Competitors have started to express concerns about the potential market distortions that might arise from such high-frequency trading strategies.

Given this context, which of the following statements about the impact of algorithmic trading on equity markets is most accurate?

Algorithmic trading consistently leads to increased market depth across all equity markets.

Algorithmic trading can exacerbate market volatility during times of crisis by triggering large sell orders.

Algorithmic trading completely eliminates human errors in trading strategies.

Hint

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