medium · Market Microstructure
Which of the following best describes the 'Grossman-Stiglitz Paradox' regarding market efficiency?
- Informed traders always lose money to dealers over time simply because of the bid-ask spread charged on each trade.
- High trading volume leads to lower volatility in all market structures, regardless of who is doing the actual trading or why.
- Public information is always reflected in prices faster than private information, since public data costs nothing to obtain or verify.
- If markets were perfectly efficient, no one would have an incentive to gather the information needed to make them efficient.
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