Investors Benefit From An Uber Equivalent
We've all been there before. Waiting endlessly for a taxi the dispatcher said was en route, but that never actually showed up. Standing in the rain on a street corner during a crowded rush hour, waving at one taxi after another, only to give up after realizing the effort was futile. Meetings were missed and opportunities were lost. But those who had cars? They arrived at their destination. Those with money to spend on limousine services? On time and in comfort.
Then came Uber, the ultimate market maker between passengers and drivers. Harnessing technology and recognizing the inefficiencies in a transportation marketplace dominated by the monopoly of taxi medallions, Uber disrupted the marketplace, and introduced a level of price transparency and competition that provided a sought-after service for customers and drivers. When you need a ride, you want driving services rushing to compete with each other to pick you up.
The same can be said for the financial markets. When you want to buy or sell a stock, you want sellers or buyers competing to transact with you, competing to give you a fair price in a timely manner. You want Uber in the markets.
Fifteen years ago there was no Uber equivalent on Wall Street. Traders raised your shares up in the air and hoped someone would stop. Today investors have an "Uber"-professional traders utilizing high frequency trading to compete with each other with an eye on offering you a fair price for your shares in a timely manner.
Democratizing the Market
Taxi medallions in New York City have historically limited the number of market participants in order to close the marketplace to competition, all the while concentrating profits into the hands of a few. People who wanted to compete in the space could not. When medallions were available they sold for over a million dollars a piece.
Uber disrupted a closed, wholly monopolized marketplace, giving those eager to provide transportation services to customers the ability to do just that.
Our financial markets used to be closed. Not everyone who wanted direct access to the trading floors could get it. Only floor traders had timely access to information, and knowledge of order-by-order updates to the market. Occasionally, someone wishing to access the floor could buy a seat, but by 2005 the cost was greater than $3 million.
Professional traders, many of them the high frequency traders sometimes demonized in the media, have democratized trading market in the way that Uber has democratized transportation. Anyone who invests in a server and a line can have "floor-like" access to the exchange. Information is distributed to all who want it and the costs of connecting are much less than they were to buy a seat.
Better Technology, Better Markets
Uber uses technology to more efficiently connect drivers and passengers - the participants in the transportation market. Uber uses technology to ensure appropriate transparency: more information about who the driver is, where cars are, estimated travel times and an audit trail of length of trip and cost.
Professional, high frequency traders are the equivalent of Uber in today's modern financial marketplace. Motivated by intense competition, professional traders have opened up a once closed market with innovation. Using cutting edge technology, professional traders have reduced investor costs and provided more expediency.
Furthermore, electronic trading is fully auditable, thus simplifying the job of regulators charged with policing the market and weeding out bad actors. Technological innovations - and the responsible professional traders that deploy them - have greatly benefited investors.
Bumps in the Road
Yet no matter how much efficiency Uber brings to the transportation marketplace, there will still be difficulties in getting from point A to point B. Traffic jams, construction, and pot holes all slow down a passenger's journey. But these disruptions are not the fault of Uber or its drivers. They are separate problems that can be fixed while reaping the benefits of Uber
Similarly, the structure of today's financial markets is not perfect. Venue fragmentation, internalization, payment for order flow, complex regulation, and skewed incentives can all sour an investor's experience. But these market structure negatives are not the fault of high frequency trading.
Professional traders will continue to improve markets with high frequency trading whether or not these troubles exist. We can strive to remove these barriers to exchange from the marketplace, all while maintaining the benefits of HFT.
Most of all, we must ensure that we do not return to a past that was anti-market, and as such, anti-investor. We must ensure that we have open, fair, and transparent markets that benefit investors by virtue of fostering competition.