hard · Market Microstructure
An uninformed trader consistently uses limit orders. Which scenario correctly describes the 'adverse selection' problem they face when their order fills?
- Their buy limit order fills only when an informed seller knows the stock's fundamental value has dropped below the limit price.
- The exchange's matching engine prioritizes their order because they are an uninformed retail participant.
- Their buy limit order fills at a better price than the market midpoint, providing immediate alpha.
- They pay the full bid-ask spread to ensure execution during periods of low volatility.
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