hard · Market Microstructure
A buyer executes at 100.04 (M_t = 100.00). The realized spread is -0.04. Interpret the relationship between effective spread and adverse selection.
- The trade had no adverse selection because the realized spread was negative.
- The effective spread is twice the adverse selection component.
- The adverse selection component is equal to the effective spread.
- The adverse selection component (0.12) is 1.5 times the effective spread (0.08).
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