Understanding Algorithmic Trading Effects

Medium Equity Market Structure Algorithmic Trading

Algorithmic trading has transformed the landscape of equity markets, employing complex mathematical models to execute trades at speeds and frequencies beyond human capability. It offers several advantages, including efficiency and reduced transaction costs. However, it also introduces risks such as market liquidity issues and increased volatility. Consider the following scenarios:

Which of the following statements regarding algorithmic trading is accurate?

Algorithmic trading systems typically rely on discretionary decisions made by human traders.

Algorithmic trading can enhance market liquidity but may contribute to excessive volatility in times of market distress.

Algorithmic traders primarily execute orders through direct market access platforms that require manual input for trade execution.

Hint

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