I find this description weird. It's not like they provide a service. They act for their own profit and the fact that they make the spread smaller is a bit of a side effect. Why call that a service? You wouldn't pay them directly to do those trades.
Sure, you'd spend more on your buy orders otherwise. So what? It just makes the stock gambling a bit different.
Lol, as opposed to all the other actors in the economy who provide a service.
>and the fact that they make the spread smaller is a bit of a side effect
It's not 'a bit of a side effect', it is what they have to do to earn fills or they will be undercut by their competition. Narrowing the spread is literally what a market maker is paid to do. It is their reason for existence. It isn't a 'side effect'. If you make a spread narrower than your competition, you steal his customers. Otherwise you don't trade and you don't make any money and you are out of business.
> Why call that a service?
It is a service. A very useful one. They offer, for a specified price, to sell (or buy) a financial instrument to (or from) you.
No one forces you to use it. If you don't want to, and think you can do better, you can take your chances and place a limit order in the book instead.
So like all services, it is completely optional, costs you money (to cross the spread), and provides you a benefit (immediate execution and certainty of price).
I suspect what you are struggling with, is that you don't realise that risk transferral is a benefit. Take for example, the dairy farmer who sells his milk to a company (a middleman) that transports it, pasteurizes it, bottles it and on-sells it to a supermarket chain. In this case, you would probably tell me that you can see what service they provide - they add value by pasteurizing and bottling the milk, which they specialize in. Which is true. But there is a hidden value too - they take risk away from the farmer. The milk could spoil, the trucks could breakdown, the vats be contaminated, the supermarkets cancel their orders. All of these are risks that the farmer would have to bear if the farmer wanted to bottle their own milk, take it to a market and sell it. Part of the service provided is to take risk away from the farmer and be paid for it.
That is all a market maker does. They offer you the opportunity to dispose of your risk (the risk that the financial instrument you hold may move against you in the time it takes you to find a buyer or seller) instantly by paying a very (very) small fee to do so.
> Lol, as opposed to all the other actors in the economy who provide a service.
I see what you mean and there may not even be a visible difference from outside.
But I think there's a big difference between "I'm going to make money getting grocery products as cheap as possible and selling them as high as local market can handle it" and "I'm going to open a grocery store in an area which doesn't have it yet and make money providing products to people". Effectively they're the same and some people may think of it as the first case.
I just don't believe anyone doing HFT cares one bit about the rest of the market. They are in it to make money. It just happens to lower the spread. If there was a way to do it by making the spread larger and pissing everyone else off, they'd still do it.
Different example in real life in some countries - homeless people collecting glass bottles from the street so they can return them and get some change back in countries where recycling cost is added to the price by default. You're paying for it when you're buying a drink and not returning the bottle yourself. They get money for cleaning the street. But it just happens to be connected - I wouldn't say you're paying the homeless for the street cleaning service.
> I wouldn't say you're paying the homeless for the street cleaning service.
I certainly would. Are you arguing just because the government is interposed in the process that it is no longer a service you are paying for?
Ok, let's try a different angle. Imagine a world where financial markets aren't electronic and brokers don't exist. You have 5 Apple shares that have a fair value of $500. The only way to sell your shares in this fantasy world is to physically find someone who wants them. Maybe you call people on the phone, maybe you spam some e-mails. You get the full $500 if you find a buyer, but it takes labour and time. The labour is costing you, since you could be doing something productive that you are more skilled at. And the time is costing you, because you want the $2500 now to pay the rent, and if Apple shares plunge you could be in trouble!
So I, for the first time ever, get the idea to set up a lovely looking shop on the corner and offer to buy them from you for $499 each, and I'll handle the rest. You come in with your share certificate, we shake hands, make small-talk, exchange money. Surely you agree this is a service?
So I am slightly baffled. All that has changed is that the process outlined above has been made electronic, and now you claim it isn't a service? Do shops selling shit on ebay no longer qualify as services?
Sure, you'd spend more on your buy orders otherwise. So what? It just makes the stock gambling a bit different.