Consequences of Algorithmic Trading During Volatility

Hard Equity Market Structure Algorithmic Trading

In the context of equity market structure, algorithmic trading employs advanced software to execute large orders swiftly and efficiently. It has transformed trading dynamics, enhancing liquidity but also raising concerns about market stability and fairness.

Consider a scenario where a hedge fund employs an algorithmic trading strategy that utilizes market data to execute trades in small increments to avoid significantly impacting stock prices. During a volatile market period, this strategy led to an unanticipated increase in trading volume, triggering various regulatory alerts.

Which of the following best describes a potential consequence of algorithmic trading in this scenario?

Algorithmic trading reduces transaction costs and promotes price efficiency under all market conditions.

Increased volatility can arise from algorithmic trading, as it may amplify price movements during rapid market changes.

The use of algorithmic trading guarantees better execution prices for institutional investors compared to traditional trading methods.

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