Question

What are three accomplishments of algorithmic (algo) trading?

a) Reduces market volatility, Increases risk exposure, Slows down trade execution
b) Increases market transparency, Lowers liquidity, Speeds up trade execution
c) Improves liquidity, Enhances market efficiency, Reduces transaction costs
d) Increases market manipulation, Reduces profit margins, Slows down trade execution

Answer 1

Algorithmic trading improves liquidity, enhances market efficiency, and reduces transaction costs.

Step-by-step explanation:

c) Improves liquidity: Algorithmic trading improves liquidity in the market by increasing the number of buy and sell orders. This is because algo trading allows for faster execution of trades, resulting in more market participants and increased liquidity.

Enhances market efficiency: By using complex algorithms, algo trading eliminates human errors and emotions from the trading process. This leads to more efficient and accurate trading decisions, which in turn improves overall market efficiency.

Reduces transaction costs: Algo trading reduces transaction costs by minimizing the impact of transaction fees and spreads. It can also take advantage of small price differences across multiple markets, resulting in more cost-effective trades.