First, I never said it was a great idea, or that we should. It's not about envy or not. Liquidity provides a great service, if we need long market hours. If we don't need long market hours, it arguably provides little to no value.
Yes it would massively reduce liquidity, that's the point :) Yes volatility would go up during that hour(especially at the beginning), because everyone would have to figure out the new pricing, but it would remove the need for liquidity as well. It would bring all the sellers and buyers together at the same time, eliminating the need for market makers to provide liquidity.
I'm not suggesting we actually do this, in fact, the markets are trending the other way to 24/7 market trading. I'm sure Jane Street and the other liquidity providers are 100% on board with this plan of 24/7 trading.
Personally, I'm very happy with the status quo, 7.5hr trading days M-F. Though personally I'd prefer they shift a little later so it's easier for west coasters to trade at market open. I.e. shift from EST to CST. I know that won't happen, but that would be my only real complaint.
> Jane Street’s 2613 employees are replacing at least 10x that many needed to perform the same critical and necessary service to the markets from 30+ years ago.
Agreed, they are doing a bang up job providing liquidity to the markets. I'm happy for them. I use their service, it's great.
If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
> Liquidity provides a great service, if we need long market hours.
If Jane Street is so critical to the normal functioning of markets that their significance between "exists" and "don't exist" is a major change in liqudity, then they are a systemic risk.
They probably don't want to be viewed as a systemic risk to the financial system.
But when you are siphoning this much money out of the financial systems worldwide (to the point your employee equity looks to be going almost logarithmic), how much further can this go until "providing liquidity!" isn't good enough any more?
That's been the go-to answer since forever, anytime anyone questions what value is being added to the economy.
> If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
This is categorically false. Long electronic trading hours are simply a better solution, a more fair solution, a more competitive solution, a more efficient solution, and what the market is demanding. There is no trade off, especially as most liquidity is supplied by automated systems that can operated 24/7/365 if needed.
When you compress transactions into specific time frames it isn't about forcing buyers and sellers to meet, you actually will reduce the numbers of buyers and sellers overall, you will lower the value of the asset, because assets are given liquidity premiums. The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
When a primary issuer creates new securities this is very different situation and why an auction is needed, for example for new treasury bonds or any other initial offering. In that situation there is only 1 seller, the issuer, and the question is what is the starting fair price at which buyers appear.
In a secondary market there are many current owners of the asset and many potential sellers. They don't decide to sell or buy independently and then meet. That is simply not what occurs. Instead think that every current owner is a potential seller and every participant who follows that market is a potential buyer. Sellers attract buyers, buyers attract sellers, both when they push the prices around via the market makers. By extending the time period for this dynamic to occur to continuous central limit order books (CLOBs) it make the most efficient process, periodic auctions have been proven to be very poor ideas and results in choice paralysis of participants, CLOBs incentivize higher rates of decision making and healthier dynamics. All properly operated CLOBs will also have a circuit breaker to auctions should time be need to digest rapidly changing information and the continuous book can't be created within some limits.
By having extended market hours you widen the pool of buyers and sellers who can participate. You also allow markets to instantly digest new information as quickly as possible, this is most fair to all participants equally.
Extended trading hours are strictly better than restricted trading hours.
You seem to imply I think it's better without them. I'm not saying that at all. I'm saying we could do it without them, if we, collectively, wanted to. Is there a cost to that? Of course there is, there is a cost for any big change like this.
Private Equity seems to do just fine without any of these liquidity problems.
Bond Markets are completely private still, sure some market makers are now playing in that space, but it's still completely private transactions and you are on your own to find buyers and sellers. Seems to work well enough.
Certainly public markets and stock exchanges are great inventions, but we didn't have market makers in the early stock markets for a very long time. Well one might argue JP Morgan(the man, not the bank) was THE market maker for all of the NYSE early history. He certainly bailed out the markets once or twice before the Fed existed and decided to do the job for him.
So we can absolutely do it without market makers. So I stand by it being a trade-off. If one really wants to kill off market makers, we can, that doesn't mean we should.
> The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
This would imply that Cash should be more valuable than it is? USD cash has near infinite liquidity, but at best it's worth around 0%/yr real return.
> You seem to imply I think it's better without them.
Yet these are also all you:
> We could essentially close them down if we moved all trading to say 1 hour a day.
> If we as a society want long liquid trading markets, then we need people like Jane Street to provide that liquidity. If we don't want long liquid trading markets, we can eliminate them and force buyers and sellers to meet all at a given point in time. One is not necessarily better than the other, it's a trade-off.
I responded that it is incorrect. You claimed that restricted hours and/or auctions are not necessarily worse, implied better for various envy based objectives that are commonly voiced in many of the comments under this article.
I am contenting that Continuous CLOBs with extending trading hours are technically better markets in every possible measurement. That is my position, it’s unambiguous and different than yours. I’d suggest you would prefer ambiguous positions that would elicit agreement and convey virtue than to take a hard stand for or against a topic.
> Private Equity seems to do just fine without any of these liquidity problems.
PE notoriously has liquidity issues. There are private platforms for qualified investors. PE also is focused on primary issued securities not secondary open free markets which we are discussing. So your observation is both irrelevant and incorrect.
> Bond Markets are completely private still, sure some market makers are now playing in that space, but it's still completely private transactions and you are on your own to find buyers and sellers. Seems to work well enough.
Bond markets are very very far from private. They are completely open but just not to small time investors other than indirectly via ETFs, which ironically the article explains is a massive source of income for Jane Street as they transfer institutional liquidity and prices into individual accessible ETFs. However the underlying cash and futures and options markets on both government, municipal, and corporate bonds are completely public and to any operator who can post the required collateral and meet the technical participation requirements. Trade sizes are often $1M notional minimal. In fact corporate and government bond markets are highly competitive and have extended trading sessions. So again you are technically incorrect.
> Certainly public markets and stock exchanges are great inventions, but we didn't have market makers in the early stock markets for a very long time.
Yes you did. Market making was a dedicated profession going back to the earliest exchanges and markets, including in Dutch empire, also in Roman empire times. Gold
market makers / dealing in bazars is 1000s of years old. I have no idea why you would believe such an incorrect opinion.
> Well one might argue JP Morgan(the man, not the bank) was THE market maker for all of the NYSE early history. He certainly bailed out the markets once or twice before the Fed existed and decided to do the job for him.
JP Morgan was a market manipulator and crony capitalist who using corruption bailed himself and his associates out of loses using the FED. Your example is extremely ironic if you actually understand what happened.
> So we can absolutely do it without market makers. So I stand by it being a trade-off. If one really wants to kill off market makers, we can, that doesn't mean we should.
> > The more you restrict transactions and reduce liquidity the less utility an asset has. This is one of the often overlooked reasons Bitcoin has more intrinsic value than is assumed at first by observers.
> This would imply that Cash should be more valuable than it is? USD cash has near infinite liquidity, but at best it's worth around 0%/yr real return.
This is a misunderstanding of the liquidity premium. Holding all other attributes constant of an asset, the intrinsic value, the income rate, all other relevant factors, then a more liquid asset vs less liquid asset with the same other attributes will have a higher market value. This is basic stuff.
You are missing the forest for the trees and misunderstanding what I'm trying to convey.
Even if we shifted to 1hr trading a day, we would still have market makers, but they would charge a lot more and a lot less people would use them. They would become more like pawnbrokers or middle-men, not be considered a must-have, like they are considered now. Much like your market makers of old.
For institutional investors, most all of their trading is already done either right at market open or right before market close, so it wouldn't be much of a shift for anyone except for retail investors.
I never said JP Morgan was a great guy. I basically agree with your characterization of JP Morgan. That said, he totally saved the NYSE and the larger American economy a few times anyway.
You are partially there in your understanding of the bond markets. There are public bond markets(NYSE, NASDAQ as examples) in the US, but they act very different from the stock markets, and they don't represent most of the actual bond market that is traded every day. The NYSE bond market still does public auctions of bonds for example.
There are MANY private bond markets. They don't regularly/always intersect. Bond markets as they exist today are still very new, and still not well understood. Pimco basically created the first ever regular bond market only a few decades ago. Before that pretty much all bonds just got stuck in some insurance companies filing cabinet never to see the light of day until it was time to collect a coupon. Even now a large portion of the bond market does effectively the same thing, except it's a digital file these days instead of a filing cabinet.
If I show up @ Brokerage A with 5M and want to trade bonds, they will for sure let me talk to their actual bond desk, but that doesn't mean they can facilitate my trade. I may have to shop around a few different bond desks to get my trade done. It obviously depends on how big that bond desk is and if they have any expertise in the particular bond I want to trade.
For stocks, if I show up with 5M and want to trade a stock, any brokerage anywhere well let me buy the stock.
TRACE, the system FINRA uses to monitor and manage the US OTC bond market doesn't even track all bond trades. Though they do track most of them now, however.
Certainly the bond markets are slowly becoming more public, but they are nowhere near public yet.
Corporate and government bonds have many venues and have for decades and in my opinion they are public in the sense that any qualifying participant can get access to them. Can an individual with a $10k in a 401k, no, but US treasury cash bonds have had published prints and quotes since 1970s. I personally remember corporates and converts prices and trades on my early Bloomberg terminal.
Now perhaps you call them private because they were and still mostly are for institutional traders however they are published prices and/or RFQ systems or there are continuously published two sided quotes. Yes big trades happened on phones and Jane Street is still involved in it.
When I think of a private market it means a market where prices and transactions are not published. So our terminology is different.
Fundamentally we disagree on the role of dealers and market makers. In my personal extensive market experience they are foundational and always have been. They carry inventory and manage risk. This has happened literally for 1000s of years and even in early NYSE and in the earlier stock markets in London and Amsterdam they were the key players in the price discovery process.
What you claim, that markets can even function with time restrictions and without two sided quoted dealers/makers in my world is absurd. I have nothing more to say. I don’t believe you have real world extensive market knowledge and if you do, you must he significantly younger than me. Goodnight.
