2 ms·

It's clear why we need investors. Why do we need day traders? Well, they can only exist because the investors exist, and they provide the function of pricing t

by javert 14y ago

It's clear why we need investors. Why do we need day traders? Well, they can only exist because the investors exist, and they provide the function of pricing the market accurately. And provide liquidity to investors. Nobody is arguing that we should ban day trading. Why do we need market makers? Well, they definitely benefit the day traders, because they do lower the bid/ask spread, once again making pricing more accurate. And provide liquidity to day traders. So what I'm proposing is that we only "really need" investors - but day traders are good for investors, and market makers are good for day traders. Thus, market makers are good for investors. I'd be legitemitely interested to hear criticism of the above argument. I've been learning about market making recently, and I'm certainly sure that there's still more for me to learn.

_delirium 14y ago
I don't disagree in broad terms, but I think it's also quite possible that some configurations of trading will result in the "support" tail wagging the investment dog. At least, that would be the expected result if you think of markets like a dynamical system; in non-trivial dynamical systems (which I'd assume the economy is), the usual case is that there are significant internal dynamics (feedback loops, attractors, etc.) that in a number of cases will modulate, and may even dominate, the movements caused by external inputs. If that transfers to trading, there may well be pathological market dynamics that have little to do with the fundamentals of providing services to (ultimately) investors. Whether the dis-value of those pathologies produced outweighs the value of the services provided would then be the relevant question. Viewed as a machine, does the machine that includes the HFT lubricants run better in general, or is the reduced friction offset by a undesired effects such as greater risk of malfunction?

by javert 14y ago

_delirium 14y ago

I don't disagree in broad terms, but I think it's also quite possible that some configurations of trading will result in the "support" tail wagging the investment dog. At least, that would be the expected result if you think of markets like a dynamical system; in non-trivial dynamical systems (which I'd assume the economy is), the usual case is that there are significant internal dynamics (feedback loops, attractors, etc.) that in a number of cases will modulate, and may even dominate, the movements caused by external inputs. If that transfers to trading, there may well be pathological market dynamics that have little to do with the fundamentals of providing services to (ultimately) investors. Whether the dis-value of those pathologies produced outweighs the value of the services provided would then be the relevant question. Viewed as a machine, does the machine that includes the HFT lubricants run better in general, or is the reduced friction offset by a undesired effects such as greater risk of malfunction?