easy · Market Microstructure lob
In a quote-driven market, why might a dealer widen their bid-ask spread during periods of high volatility?
- To discourage retail investors from participating in the market at all times.
- Because exchange regulations mandate wider quoted spreads whenever prices are moving rapidly.
- Because the dealer's technology and infrastructure costs rise as trade frequency increases sharply.
- To compensate for increased inventory holding risk and higher adverse selection costs.
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