medium · Market Microstructure adverse-selection
In a competitive dealer market, what occurs if a dealer quotes a spread wider than the sum of their costs (processing, inventory, and adverse selection)?
- Informed traders will prefer that dealer because of the higher execution certainty.
- The dealer will capture all the order flow from uninformed traders.
- The regulator will immediately suspend the dealer's license for price gouging.
- New competitors will enter and undercut the quotes until the economic profit is zero.
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