Impact of Algorithmic Trading on Market Volatility

Medium Equity Market Structure Algorithmic Trading

In recent years, algorithmic trading has gained substantial traction in global equity markets, leveraging technology to execute trades at speeds and frequencies far beyond human capabilities. These complex mathematical models and algorithms are utilized for a variety of purposes, such as arbitrage, market-making, and executing large orders with minimal market impact.

A portfolio manager at an investment firm is evaluating the impact of algorithmic trading on overall market liquidity and price discovery mechanisms. The manager is particularly interested in understanding how these trading strategies interact with traditional trading patterns.

Which of the following statements correctly describes a potential outcome of algorithmic trading in equity markets?

Algorithmic trading exclusively improves market liquidity by always providing more buyers and sellers.

Algorithmic trading can lead to increased market volatility due to rapid buying and selling activities.

All algorithmic trading strategies are designed to minimize trading costs at the expense of execution speed.

Hint

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