5 ms·

Why do you think there wouldn't still be market makers if the spread widens by 2%?

by consz 13y ago

williamcotton 13y ago
Well, what's the difference to me if the spread is 0.1% or 2%? Am I really not going to buy? If I want to buy a security, don't I have to buy it at whatever price is being offered? Sure, some dude can cover the spread on both sides, but if the guys selling it to me just passed it through 50 hands going from the firm that issued the security to get to me, what's the point of all that? Like, I get the point of the liquidity offered by market makers, but I'm just questioning the marginal utility. How much less likely am I to buy or sell a security based on the marginal decreases in the spread? It doesn't seem like it would be linear. And what effects are caused by having so much complexity between the issuer and the investor?
- tptacek 13y ago
  The difference is whether you pay middlemen 0.1% of the value of your trade of 2% of your trade. If you can't get worked up over a 100+bp difference in cost of trading, you shouldn't be worked up over HFT, which is operating at much smaller price deltas.
  - williamcotton 13y ago
    Is a marketplace designed for retail investors that disallows HFT something that would be better or worse for retail investors? Let's pretend that the marketplace only sells securities with dividends. The people buying them are not interested in their liquidity, only in their ability to store value as well as ofter a steady return. Why would I want to buy shares in companies in any other type of marketplace? Can you explain how this hypothetical market would function differently than how our current markets function?
    - tptacek 13y ago
      Worse. You don't have to guess: there are two compelling pieces of evidence you can use to evaluate. First, you can look at spreads since electronic traders wiped out the 1/8ths market makers in the 1990s. Second, you can look at the Canadian experiment that increased cost of trades and drove spreads up. "Type of company" and "marketplace" are orthogonal concerns.
      - williamcotton 13y ago
        Let's say I'm not interested in spreads or liquidity beyond being able to within a day or two purchase or sell a share that pays dividends on company earnings. What would make me want to go with a market that offered lower spreads and more liquidity? How would it affect a long term holder? Isn't there a cost to all of these transactions occurring? Like, why do I need the spread to be as small as possible? How much is actually saved? How much are the infrastructure costs for maintaing a marketplace that supports these high frequency trades? Isn't there room for a much simpler, low frequency marketplace that had fractions of the operational costs? Couldn't savings be passed on to retail investors with a cheaper marketplace?
        tptacek 13y ago
        Why would you go with a market that offered lower spreads? What a strange question. You'd pick the market that offered the lowest cost of trades, which absent some other fact you haven't named, is the one with the lowest spreads. There is the opposite of a cost to normal investors of "all these trades" occurring. The volume of trades makes the pricing of stocks more competitive and increases the odds that when you want to trade, someone who agrees with you about the price of that stock will be available to take the other side of the trade. This discussion keeps waving the term "spread" around like a totem, but in reality the term just captures that paragraph.
        williamcotton 13y ago
        The infrastructure required to offer incredibly low latency trades and super high volumes seems like it would cost a heck of a lot of resources. I'm not convinced that all of these marginal gains makes up for these costs. I don't get the jump from describing an illiquid real estate market to this hypermarket with millions of trades a second. Are you telling me that it is a linear function? We will always need more trades, and more volume? What about the underlying economic activity? How does this follow any sort of market fundamentals? Are you really saying there is no upper limit? How could that make any sense at all?

Why do you think there wouldn't still be market makers if the spread widens by 2%?

by consz 13y ago

Why do you think there wouldn't still be market makers if the spread widens by 2%?

Well, what's the difference to me if the spread is 0.1% or 2%? Am I really not going to buy? If I want to buy a security, don't I have to buy it at whatever price is being offered? Sure, some dude can cover the spread on both sides, but if the guys selling it to me just passed it through 50 hands going from the firm that issued the security to get to me, what's the point of all that? Like, I get the point of the liquidity offered by market makers, but I'm just questioning the marginal utility. How much less likely am I to buy or sell a security based on the marginal decreases in the spread? It doesn't seem like it would be linear. And what effects are caused by having so much complexity between the issuer and the investor?

tptacek 13y ago
The difference is whether you pay middlemen 0.1% of the value of your trade of 2% of your trade. If you can't get worked up over a 100+bp difference in cost of trading, you shouldn't be worked up over HFT, which is operating at much smaller price deltas.
- williamcotton 13y ago
  Is a marketplace designed for retail investors that disallows HFT something that would be better or worse for retail investors? Let's pretend that the marketplace only sells securities with dividends. The people buying them are not interested in their liquidity, only in their ability to store value as well as ofter a steady return. Why would I want to buy shares in companies in any other type of marketplace? Can you explain how this hypothetical market would function differently than how our current markets function?
  - tptacek 13y ago
    Worse. You don't have to guess: there are two compelling pieces of evidence you can use to evaluate. First, you can look at spreads since electronic traders wiped out the 1/8ths market makers in the 1990s. Second, you can look at the Canadian experiment that increased cost of trades and drove spreads up. "Type of company" and "marketplace" are orthogonal concerns.
    - williamcotton 13y ago
      Let's say I'm not interested in spreads or liquidity beyond being able to within a day or two purchase or sell a share that pays dividends on company earnings. What would make me want to go with a market that offered lower spreads and more liquidity? How would it affect a long term holder? Isn't there a cost to all of these transactions occurring? Like, why do I need the spread to be as small as possible? How much is actually saved? How much are the infrastructure costs for maintaing a marketplace that supports these high frequency trades? Isn't there room for a much simpler, low frequency marketplace that had fractions of the operational costs? Couldn't savings be passed on to retail investors with a cheaper marketplace?
      - tptacek 13y ago
        Why would you go with a market that offered lower spreads? What a strange question. You'd pick the market that offered the lowest cost of trades, which absent some other fact you haven't named, is the one with the lowest spreads. There is the opposite of a cost to normal investors of "all these trades" occurring. The volume of trades makes the pricing of stocks more competitive and increases the odds that when you want to trade, someone who agrees with you about the price of that stock will be available to take the other side of the trade. This discussion keeps waving the term "spread" around like a totem, but in reality the term just captures that paragraph.
        williamcotton 13y ago
        The infrastructure required to offer incredibly low latency trades and super high volumes seems like it would cost a heck of a lot of resources. I'm not convinced that all of these marginal gains makes up for these costs. I don't get the jump from describing an illiquid real estate market to this hypermarket with millions of trades a second. Are you telling me that it is a linear function? We will always need more trades, and more volume? What about the underlying economic activity? How does this follow any sort of market fundamentals? Are you really saying there is no upper limit? How could that make any sense at all?