I don't think that's true. It's certainly more convenient for me to go the grocer and know that, usually, they'll have bananas for sale. However, during the summer in my town there is a farmers market every week, where I actually can go and buy produce off the back of a truck. The prices are often cheaper and the products are often better. (Sometimes the prices are higher, but that's because the products are better: organic, varieties that don't ship well, etc.)
I can take this one step further, and actually go to many of the farms around here to buy produce right off the plants, by picking it myself. Even less convenient, but it makes for a nice weekend outing, and the prices are even cheaper.
Note that in both cases the prices drop for me and stay the same for the farmer by cutting out middle-men: the shippers, the grocer. By your terms, those are the market makers, and while they make produce commerce more convenient they're certainly not reducing costs for anyone. They're taking profits out of the parties on the two ends of the transaction.
I'll grant you that, in my example, the middle-men provide an essential service by giving me access to produce that is not produced locally, and by making that access more convenient. Neither of those apply to the financial markets though: as purely information-driven markets, they're accessible 24/7 from anyplace in the world. So again, what value are the market makers actually providing to the buyers and sellers of financial products?
Fair enough, the words about cheaper are arguable. I wouldn't want to try to buy bananas in a world where there was no one willing to take them off the truck and hold them for a few days though.
As far as financial markets, reliable prices are worth something (even though a reliable price is 'just information'). I agree that in heavily traded instruments, providing liquidity becomes a fairly abstract value, but if you are a large institution, having someone that will readily purchase enormous amounts of shares is a valuable service. For a lightly traded instrument, being able to sell it is also a valuable service.
I don't see enormous value in having lots of people spending lots of money chasing pennies, but I have trouble getting worked up about it. I suppose what it comes down to is that I am skeptical that rules designating who gets the tiny bit of slop available in financial transactions will be any more fair than the present system (where various HFTs are competing for the slop, often by essentially offering some of it to the parties in the transaction...).
If you're a large institution, and you want to sell an enormous amount of shares in some stock, the price of that stock should plummet if there aren't buyers available at the price you want to sell. Having a market maker buy those shares is hiding the fact that a huge position in the stock was just dumped and no one wanted to buy. Sucks for the company, but if you're not attractive to buyers or to the seller, then your market valuation was already wrong.
This would also curb the behavior of the large institution. They shouldn't be able to dump all of their holdings of a stock like that at a high price if there aren't real buyers at that price. The institution should be forced to chase the price down to pick up enough buyers for the whole position. If they still can't move it all, then they're holding a worthless stock. Sucks for them, but investing is a gamble and sometimes you lose your investment. You should've invested in a more valuable company.
The theme I'm getting at is that I think that market makers definitely alter the dynamics of the market, as they claim to, but contrary to their claims they do it in a way that benefits themselves and other financial institutions to the detriment of non-financial-industry investors and the companies and other real-value instruments (bond originators, mortgage borrowers, etc) being traded.
What is not real about the automated system? As far as I know, they pay real dollars. Is it the fact that the bet on the shares is short term?
There are some issues with HFT that I don't like, where different players are getting different access to information. Beyond that, I have trouble with the argument that parties that aren't me should have to engage in transactions that I like the shape of (or the other way around, should be prevented from engaging in transactions that I don't like. I'm using transaction here in the sense that both parties are acting freely...).
I can take this one step further, and actually go to many of the farms around here to buy produce right off the plants, by picking it myself. Even less convenient, but it makes for a nice weekend outing, and the prices are even cheaper.
Note that in both cases the prices drop for me and stay the same for the farmer by cutting out middle-men: the shippers, the grocer. By your terms, those are the market makers, and while they make produce commerce more convenient they're certainly not reducing costs for anyone. They're taking profits out of the parties on the two ends of the transaction.
I'll grant you that, in my example, the middle-men provide an essential service by giving me access to produce that is not produced locally, and by making that access more convenient. Neither of those apply to the financial markets though: as purely information-driven markets, they're accessible 24/7 from anyplace in the world. So again, what value are the market makers actually providing to the buyers and sellers of financial products?