easy · Market Microstructure
A dealer observes a sudden surge in buying activity from a hedge fund known for its superior research.
To protect against 'adverse selection,' what is the most likely response from the dealer?
- Keep quotes the same to maintain 'fair and orderly' markets.
- Narrow the bid-ask spread to compete for the volume.
- Shift the bid higher while keeping the ask the same.
- Widen the bid-ask spread.
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