Fairness and Efficiency

I didn't know if there was a quorum around here interested in Don Luskin's editorial on Flash trading and the ensuing contretemps. I assumed those who were interested were probably already up to date from Luskin's site and the WSJ.

But it has taken a turn into the philosophical today, as Luskin's coauthor has answered their critics with a smart response. While regulators think they live to make markets "fair" any non-coerced market is intrinsically fair. Hynes talks of making markets efficient, which is my interest. Capital markets don't exist to make people rich, they exist to direct capital to its best use.

Free markets don’t require equality of information. They require an absence of coercion, and protection against fraud. Free markets allow people and firms to develop expertise which create competitive advantages. Users of free markets who don’t care to develop expertise can still benefit from them. Wal-Mart customers, with no sourcing skills of their own, benefit from Wal-Mart’s efficiencies in the form of lower prices.

Twenty years ago, retail stock traders had to call in orders and wait 20 minutes or more for reports. They might miss markets due to the lag between their broker getting an order and the order getting to the post. They could not have their bid or offer shown on NASDAQ. Spreads were a minimum of an eighth of a point, and often more. Today they can go to the web, enter an order and get an execution in seconds.

Follow this link to read the Hynes defense, which I think makes great reading whether you have read the rest or not. If you want to put your geek hat on, that post has links to the original editorial and Luskin's response.

Economics and Markets Posted by John Kranz at August 28, 2009 2:09 PM