> Market-making also delivers real social utility. The deeper the liquidity provided by market makers, the more difficult it is to cause erratic spikes in price. Market makers also reduce the bid-ask spread, a concept most people aren’t even aware of: a testament to successful practitioners on Wall Street.
Until they don't. The moment people need liquidity the most is the moment the market makers have pulled all their orders and the market is in free-fall.
This statement doesn't make sense. People don't need liquidity at a moment. Liquidity isn't binary. Less liquidity, higher spreads, higher cost of trades. Those costs are a tax paid by long-term investors into the pockets of middlemen.
I'm not parent, but here's an idea that's floating around, maybe it can be used as a reasonable guess to as how to make sense of it:
There is a concern that high frequency trading is technology that, while creating liquidity, increases the tax paid by long term investors. Instead of having a meaningful spread, long term investors often have trouble filling an order before the entire market jumps, settling back down less than a tenth of a second after the investor's trade clears. The tax is paid a different way, and often at much higher amounts, given the limited data coming from trading arms of various banks.
So there is more liquidity, which is good (although, as a civilian, I still need 3 days for _my_ trades to clear on the stock market, so I guess if it was such a huge public good for trades to clear faster the rules would be different). But the market is so jumpy, and so few of the orders placed reflections of actual investor intent, that markets can enter free-fall more easily (because it's happened for no reason). So there is higher liquidity, but it doesn't come with two of the upsides of a free-flowing market: stability and lower transaction costs.
It's true that some people have that concern but the concern is not backed up by evidence. In fact, all relevant data indicates that trading costs have fallen by an enormous amount due to the automation of trading.
Are you trying to imply that this didn't happen when computers weren't involved? Like the traders in the pits were all keen to make markets when volatility was spiking and prices were dropping?
I am saying that if you're a self-styled market maker but only bidding for the 99.9% of the time when the market isn't in free-fall then the "social utility" claim is dubious.
People who place stop-loss orders would not do so if they were faced with an order book with no bids. However this is effectively what happens when the market starts to drop and the bids are all pulled.
Until they don't. The moment people need liquidity the most is the moment the market makers have pulled all their orders and the market is in free-fall.