Impact of High-Frequency Trading Under Regulatory Changes

Very Hard Equity Market Structure Market Microstructure

A financial analyst is conducting an in-depth analysis of the current equity market structure in a developing economy. The analyst is particularly interested in the impact of high-frequency trading (HFT) on market liquidity and price discovery. Recently, regulatory changes have been introduced aimed at curbing excessive speculative trading and enhancing market stability.

In this context, the analyst is evaluating the relationship between HFT and market outcomes such as bid-ask spreads, volume volatility, and information asymmetry. Which of the following statements best describes a potential outcome of high-frequency trading in light of these regulatory changes?

High-frequency trading typically leads to an increase in bid-ask spreads as market makers withdraw from providing liquidity due to regulatory uncertainty.

High-frequency trading reduces information asymmetry by incorporating real-time data into pricing, hence increasing overall market efficiency.

High-frequency trading is likely to result in greater volume volatility, especially in environments with heightened regulatory scrutiny.

Hint

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