Eh. I see the downsides of a lot of that HFT stuff, but there are upsides too. Yes a lot of it is zero sum, but not all of it is. Lowering spreads between currencies, say, does materially help non-finance actors. There are other areas of the stock market that are useful too. Ingesting financials and other non-manipulated data to better reflect a company's true worth at any time helps, for example, employee option holders that seek to have a fair renumeration for their labour.
Market makers are always talking about "lowering the spread" being this great thing they're doing to make the world a better place
Yet when I go somewhere with no liquidity and a huge spread like a crypto exchange, a deeply unpopular corner of the stock derivatives market, or a Craigslist used stuff category, the wide spread is just a mild inconvenience at worst. You get to choose between waiting for a better deal and taking a worse deal immediately
A tight spread just means that somebody is getting rich by taking that choice away from me and everyone else on the exchange. It's not the most nefarious thing in the world, but it's not particularly helpful or altruistic either.
"Yet when I go somewhere with no liquidity and a huge spread.."
Someone who wants to buy or sell goes to a market in order execute at the best price achievable, and they may be under time pressure.
If the spreads are wider at one place than another, participants will gravitate to the place with the narrower spreads. If there is better liquidity at one place than another, activity will move to that place.
The purpose of being at the market is that you want to trade.
These qualities that you dismiss, "a mild inconvenience at worst", are the essence and measure of a market's effectiveness.
"A tight spread just means that somebody is getting rich by taking that choice away from me and everyone else on the exchange."
No, it is the opposite of that. It is when spreads are wide that there is easy opportunity for getting rich. Consider: it is more lucrative to buy from one person at 10 and sell to another at 20 then to buy from one at 15.01 and selling to another at 15.02.
"You get to choose between waiting for a better deal and taking a worse deal immediately"
That is not the choice. On a good market you get both a competitive price, and you get to deal immediately.
An order that you rest on the book is called a limit order. You can do limit orders on any market, even those where market makers operate. Creating a market that offers limit orders is easy. The more challenging problem is to create a market where people can come and place market orders that get filled immediately
Four years ago, I wated to sell stock to close a deal to buy a house. I didn't want to sit around for hours or days or weeks or forever tweaking limit orders, hoping the market would move in my direction and that the house would stay on the market. I went to market to execute, got my money, and put down the deposit.
If a company goes to a market to offset risk, they typically want the convenience of getting the deal done immediately. If they have to wait weeks to close the deal, the risk might already have past by the time they could get the deal done. Liquid markets with tight spreads get rid of the workflow and loss of time inherent to haggling whilst giving you justified confidence that you are getting a competitive price.
I feel like you basically rephrased what I said, but added a little terminology around it and said it's a good thing. Market orders taking 1 second to fill instead of 80 milliseconds isn't a meaningful contribution to society.
Imagine a world with no market makers. There would still be plenty of buyers and sellers of SPY shares at any given time to keep a tight spread and fast execution, but people placing market orders would get slightly worse execution and people who can accept the risk of placing a limit order and waiting two seconds would get slighty better execution. The ONLY real difference is that there wouldn't be some market vampires magically extracting tiny bits of profit all day. Your Facebook shares would still move just fine even if nobody front-runs your order and takes a few cents from you.
I get it, market making is profitable and the victims are distributed widely enough/offset enough by trivial benefits that it's not a particularly bad thing to do. But they aren't making ANY positive contribution to society AT ALL by squatting on the exchange and intercepting all the market orders at a profit.
(Full disclosure: this whole argument obviously goes a different direction when you start talking about derivatives, since market makers are mostly the ones who create and offset the derivatives. I could believe an argument that they're making the world a better place by making it quick and cheap to mitigate financial risk)
What is your goal? Is it better markets, or getting rid of market makers?
You seem fixated on the latter, to the extent that you will define away the quality measures of a market to get there.
The vampire/victim labelling you use is unreasonable. Market makers rest liquidity on the book and then other participants choose to interact with them. Both participants have chosen to enter the deal.
You propose a market without market makers. If you set up such a book, I expect you would find that nobody would want to trade there because they will get better prices and more liquidity elsewhere. If it was a good model, then all the exchanges would be doing it.
You misuse the term front-running here. Front running is when a broker has an order from a customer, and places orders on their own behalf before processing the customer order. In doing so they would put their own interest ahead of the customers. Rules about front running are a form of consumer protection. On-exchange market makers do not have customers, so the concept of front running is not relevant there.
