Fully agree, especially during current instability. I think that everyone got used to constant "it's about to crash" news but the volatility and uncertainty are visible in recent months. I don't remember when inflation numbers releases were that impactful.

The good coming out of this is the visibility of how strongly dependant cryptocoins are.

The "Stock Market" is down since July, it might not have crashed but it's not going up

Ukraine kicking off is not going to help in a sane world, but it's not a sane world so I half expect all time highs while Odessa burns

One aspect of buying securities and currency is the stability. People like stability, they will pay extra for secure cash flows, consistent courts, and rule of law that is predictable. In which case, because of its practical distance from Russia I would be optimistic about the US’s relative position, even if nominal equity values decline, they will maintain their relative value assuming the US does remains relatively more stable than other countries.

but... it does explain some of the most ubiquitous and fundamental problems of markets, like spreads and illiquidity? granted you could go on forever about an infite list of problems, eg that today so much trading happens in dark pools, so much stocks are owned by passive index etf managers who don't take an active role in ownership etc etc but for a rough summary I think this article explained some of the basics quite well

Do you have any in mind?

I guess considering this was taken from a course in economics I'm not surprised. They don't criticise markets there or look at critical theories at all.

I guess a few facts like markets are not always efficient, they are often irrational, there has never really been a "free market", its been distorted by governments and powerful agents... Corporations were the ones who created market regulation so that they wouldn't be subject to its vagaries.

"market makers" ?

Why are they a bad thing?

Many market makers profit off speed and information advantages while providing liquidity. There are alternative market structures like frequent batch auctions that would allow better trading, lower spreads and negate the HFT speed arms race. This paper is a good overview:

https://www.aeaweb.org/articles?id=10.1257/aer.104.5.418

And the reason their orders execute in front of others' is because they offer the best price. If they didn't exist I would have to pay a little bit more to buy, or sell for a little bit less.

Is the full paper available without a login? Alternative matching schemes to price-time priority suffer their own drawbacks. Either there's no guarantee your whole order will fill (pro rata) or trade at all, and there can still be a speed arms race (there's an incentive to get your order in at the last possible moment before the batch to benefit from maximum information).

The alternative schemes he's referring to are batch auctions, which don't eliminate price-time priority per se. What they do is bucket time priority into discrete chunks, which eliminate a certain class of high frequency strategy that probably isn't particularly economically productive.

The problem with batch auctions relative to continuous time trading is that that discreteness forces market makers to charge larger spreads. That's the primary trade-off. Volume would likely be dramatically reduced while achieving comparably efficient asset allocation, but at slightly higher average transaction costs. Those higher average transaction costs however would likely go along with better tail behavior of spreads in unusual market conditions, and maybe better human interpretability under unusual conditions as well.

What it comes down to is a question of how much those non-monetary benefits are worth to your economy. The longer you force market makers to hold inventory, the more they have to charge for that risk, all else equal. However, when market volatility spikes, they're also going to be less able to play certain types of high frequency games that erode liquidity when it's most needed. It's kind of a robustness/efficiency trade-off, like many things.

Thanks for the insight, would appreciate any recommendation on where I can read more about this.

I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk. But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?

> Thanks for the insight, would appreciate any recommendation on where I can read more about this.

https://www.amazon.com/Trading-Exchanges-Market-Microstructu...

This is sort of the standard textbook on how exchanges and markets work, and has a nice discussion of the tradeoffs inherent in call auctions vs continuous time trading.

If you really want to get deep and are comfortable with math, this paper:

https://www.math.nyu.edu/~avellane/HighFrequencyTrading.pdf

explains the general framework market makers are using to make decisions.

> I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk. Ultimately, market makers are service providers. They are selling liquidity to people, and they get compensated for that. What that means is that they will go wherever their clients go. And they wouldn't necessarily make less money in a higher spread regime, larger spreads mean bigger margins for the MMs. I think they probably would overall make less, because volume would decline so much, but it's just a little more complex than more risk == bad.

> But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?

It's a little complicated. I mean, the sort of facile answer is: they wouldn't, and don't. We have a free market, if anyone wanted to they could start one of these up right now.

A slightly better answer is that some clients would prefer it and some wouldn't, and there's a reasonable argument to be made that the ones who would prefer it are more important to healthy market functioning. Specifically, it'd be much better for larger asset managers who research stocks and make careful picks based on rigorous analysis.

Right now, those asset managers, who are the people that really make the markets efficient, are being statistically frontrun by HFTs, both market makers and others. That is, some MM notices someone buying large blocks in a pattern consistent with one of these smart asset managers, and they label this "toxic flow". Backing up slightly, market makers want to sell to dumb money.

Consider a world where the only trades that occur are by "smart money". Someone only trades if they know the stock is going to go up or down, and there is no other trading activity aside from this. In this world, the MMs would make zero money, because they'd be constantly getting "adverse selected". MMs make profits roughly in proportion to the overall quantity of dumb/smart money. They make money when lots of trading happens, but the price doesn't go anywhere.

Getting back to the main thread, MMs are constantly trying to identify "smart money", and when they find that smart money, they either re-center their spread in the direction the smart money is trading, widen their spreads, or stop providing liquidity entirely. Continuous time trading makes it considerably easier to separate smart and dumb money than a batch auction would, and this means that overall these smart managers are making lower profits than they otherwise "should".

The flipside of this though is that these tactics actually improve the price that retail traders get. This is why Citadel buys Robinhood's order flow, and then offers them better prices than the open market does. They can do this because they "know" that all of the Robinhood flow is dumb money, and consequently they can safely tighten their spreads for those users.