Which option correctly represents the risk of front running in "advertise to draw liquidity" trades?

In the context of "advertise to draw liquidity" trades, front running refers to the unethical practice where a trader executes orders on a security for their own account while taking advantage of advance knowledge of pending orders from their clients. This practice can lead to significant risks, particularly for the market participants who are unaware of the impending orders.

The correct answer highlights an increased likelihood of execution issues as a result of front running. When front running occurs, the presence of large orders becomes known to other market participants, who may adjust their trades in anticipation of the price movements caused by those orders. This behavior can lead to slippage, where the execution price deviates unfavorably from the expected price due to the manipulated information flow. As a result, those placing orders subsequently may face challenges in executing at their desired price, leading to execution issues.

The other options do not accurately capture the implications of front running. For instance, while improved liquidity may seem like a benefit in some trading contexts, in instances of front running, liquidity might actually be impacted negatively as traders become wary of the market manipulations. Lower transaction costs could be misleading since execution problems could lead to higher costs incurred due to slippage or poor order execution. Likewise, better market forecasting does not inherently