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In theory, an increase in informed speculative trade due to derivatives listing has two opposite effects on measured volatility. It decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events; However, it also increases volatility due to new fundamental information is impounded into prices more rapidly. Similarly, an increase in uninformed speculative trade may increase price volatility by interjecting noise into a market with limited liquidity, or it may decrease volatility by increasing the rewards to being well informed, as a result, market liquidity increases, and thereby, volatility decreases.
Approximate Word count = 380 Approximate Pages = 1.5 (250 words per page double spaced)
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