hard · Volume Profile Analysis
In the context of the Glosten-Milgrom model, if the proportion of informed traders (π) in the market increases, what is the theoretical effect on the bid-ask spread set by a risk-neutral market maker?
- The spread narrows to attract more uninformed 'noise' traders.
- The spread narrows because informed traders provide liquidity.
- The spread widens to compensate for increased adverse selection risk.
- The spread remains constant as long as the market maker is risk-neutral.
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