Who Pays for Price Discovery?

One of the things financial markets do really efficiently is to isolate whatever economics are in the system and to allocate them as assets and price risks.

That’s even true of trading economics. We’ve already seen how inverted venues are used to “buy” queue priority by those with urgency for a fill, as well as how algorithms seem to be increasingly deploying dark mid-point orders and odd lots to minimize costs. This effectively counteracts some of the inefficiencies of artificially wide spreads for high and low priced stocks.

Unfortunately, most of the market structure debates argue a classically oversimplified view of U.S. equity markets. A more complete view of U.S. market structure shows that the costs of markets are also pretty efficient at allocating resources and costs to participants. That is inclusive of (rather than despite) incentives to attract liquidity, tiers to offer economies of scale and cross subsidies on platforms with joint products—all of which are commonplace in the broader industry.

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