Question

Which factors positively impact the bid/ask spread?

a) Increased Market Liquidity
b) Increased Market Volatility
c) Higher Transaction Costs
d) Lower Competition Among Dealers

Answer 1

Increased market liquidity, lower competition among dealers, and higher transaction costs are factors that positively impact the bid/ask spread in the financial market.

Step-by-step explanation:

The factors that positively impact the bid/ask spread in the financial market are:

1. Increased Market Liquidity: When there is more liquidity in the market, it means that there are more buyers and sellers, which increases trading activity. This leads to lower bid/ask spreads as there is more competition and a narrower gap between bid and ask prices.
2. Lower Competition Among Dealers: When there is less competition among dealers, they have more control over the bid/ask spread. With less competition, dealers can widen the spread to increase their profits.
3. Higher Transaction Costs: Higher transaction costs can contribute to wider bid/ask spreads. If the costs of executing trades are high, market participants will demand a larger spread to cover these costs.