Liquidity, immediacy or anything else in the financial markets don't have any intrinsic value. The only reason the financial system exists at all is to facilitate the efficient allocation of resources towards the production of things that have real value.
And the people creating farm equipment fully realize that. When they create new equipment they do so in order to help farmers create food more easily.
In finance, there is a whole lot of effort and innovation, but it's hard to say how much of it is helping people create real value.
Burrito? Yes. Clothes? Yes. Art? Yes. Money? No. Liquidity? No.
People don't want liquidity the same way they don't want a tune-up in their car. Nobody wants "a tune up", but people want a working auto that doesn't break down. No one wants liquidity, but a heck of a lot of people want to sell something they have so that they can get on with their life, move somewhere else, buy a new home, invest in something exciting, and so on. If you think freedom and mobility are valuable, then liquidity is valuable too - because liquidity can be very important in letting you do go where you want and do what you want when you have something important you need to sell or relinquish before moving on.
"Burritos" beget nourishment.
"Clothes" beget modesty.
"Art" begets pretension.
The irony here is that the liquidity provided by our financial system permits the use of money to acquire all of these things. It is this very liquidity that also permits the allocation of work to those with the best skill sets and solutions for the problems at hand.
I would add that (IMO) anything which diminishes suffering (in all forms) and increases compassion has value.
The value of farm equipment is in more crops being produced.
The value of liquidity is less clear. An upward sloping yield curve means people are willing to exchange more money for shorter term debt. That money can then be used to invest in the creation of more products. It's not until that point that it's clear what "real value" is being produced.
My point is that liquidity's value comes from its secondary effects of allocating resources more efficiently. It's important to have this awareness because increasing liquidity might not always be the best way to increase the efficiency of allocation.
Same with software. Software tools have value equal to (amount of things produced with them) - (value of things produced without them).
It doesn't matter whether it's the best way, just that it's effective. You typically get better results by applying many improvements than you do by just applying the "best" improvement.
And, liquidity isn't just about improving allocation.
> Software tools have value equal to (amount of things produced with them) - (value of things produced without them).
Actually not. The value of anything is the benefit of said thing minus its cost. It's otherwise independent of the value of other things.
You may decide between two things based on their relative value, but that's different.
The person who buys and holds for some time wouldn't notice the fractionally smaller spread. The majority of trading today is done automatically, and it's all this trading that sees the benefit. But, again, how useful is this sort of trading? Surely at some point it must move from "efficiently pricing securities" to gambling with the froth.
How would trading change if the goal weren't to flip your security to someone else a bit down the road, but to hold it for its intrinsic value, as higher transaction costs would encourage?
I define a "flipper" as someone whose sole purpose in owning a security is to pass it off at a higher price to another "flipper" down the road.
It was an offhand comment and my terms were non-standard, I apologize. I wasn't so much defining "flipper" by the length of time one holds a security, but the motivation for doing so.
If most of the trading boils down to huge groups of firms selling back and forth to each other, it doesn't seem to matter to me whether the spreads shrink or not. It's a zero sum game and it's just a matter of one side ekeing out more money or the other.
Also, speculators add value to the market because they push prices toward the true values. If an asset is expected to be more valuable in the future, speculators will buy it now, raise the prices, thereby encouraging consumers of that asset to use less of it. This ensures that more is available for future use.
Also, speculators also add liquidity for consumers. Unless demand for a long hedge exactly matches demand for a short hedge, you need speculators to pick up the slack.
Like what the people flipping houses did to housing prices?
Huh? The vast majority of people own stock because they think that they'll be able to sell said stock for more money later. (Yes, they'll take dividends along the way, but since there are short-term traders who "harvest" dividends, that doesn't change things.)
With bonds, there are folks who plan to hold to maturity, but they're in the minority. Other folks are just looking for fixed income for "a while" until they come up with something else to do with that money.
> If most of the trading boils down to huge groups of firms selling back and forth to each other, it doesn't seem to matter to me whether the spreads shrink or not.
Sure it does - you benefit from the decreased spread whenever you trade.
If you really think that the spread doesn't matter to you, feel free to throw $1/share my way every time you buy or sell.
Practical measures can be put in place to mitigate the negative affects of marketplace irrationality, but please do not behave as if people lack a profit motive. This extreme Ayn Rand style thinking is what drove our economy into a ditch in the first place.