12 Oct Competition is Bad for Business
Larry Tabb raised some eyebrows when he came out following the Knight Capital meltdown and said that market fragmentation had gone too far and was damaging markets. It’s a controversial position to be sure. As Larry noted in his article for Wall Street & Technology, we’ve been conditioned to believe that fragmentation and speed results in greater competition, but I think Larry’s latest comments on fragmentation make a good point.
If we were to recreate the markets from scratch today I think we would acknowledge that excessive fragmentation is counter-productive. At best, it is harmful to investors when the cost of finding the best price exceeds the benefits of price competition. At worst, it disadvantages investors by providing those on the leading edge of trading technology a means to pick-off those on the trailing edge. While we might say “so what, it’s a free market” to the latter point, I think it’s time to draw a line in the sand. If we follow this logic further, we would fragment more and more, make price discover harder and harder and pickoff even more from investors – this may be a free market but it is certainly not an efficient one.
The way the markets are structured today, fragmentation has hand-cuffed supply and demand. We have tried to compensate through technology – an appropriate response up to a point – but have succeeded in adding excessive costs and risks that are passed on to, or more likely gouged out of, investors. This is not a fair and orderly market with appropriate levels of competition serving the interests of the wider economy. It’s chaos.
And were the bad old days of exchanges convincing us they were natural monopolies that bad? Were the exchanges – with their crazy transaction fees – more damaging to the wider economy than not knowing where the best price is, having to pay good money to find it and having to pay even more to guarantee you can execute against it? I’m not so sure.