medium · Market Microstructure adverse-selection
In a market with very high noise trading volume, what does the Kyle model predict about the profitability of informed trading?
- Profitability stays constant since the informed trader's underlying signal strength hasn't changed at all.
- Informed traders exit the market entirely because the resulting spread compresses to an unprofitable level.
- Informed trading is less profitable because the signal is 'drowned out' by the noise.
- Informed trading is more profitable because the trader can trade larger sizes with less price impact.
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