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I think today's PFOF/retail transaction cost debate misses an important point: since COVID, market structure *on the demand side* has likely permanently changed. Eliminating PFOF or punishing market makers won't prevent CrazyApe69 from YOLOing his life savings away.
Markets have shifted from being viewed as a long term investment vehicle to a short term gambling vehicle. Gambling is a drug. Market makers serve the LT investors AND the gamblers. They're increasingly being used as a kind of drug dealer & are treated as such by regulators.
There's a quote from the 2015 crime thriller "Sicario" that I keep coming back to during this debate, and it goes something like this: As long as demand for a drug is high, there will always be those that will work to meet that demand.pic.twitter.com/edNbdBOWbP
It's impossible to change demand for a drug by targeting its supply. "Order is the best we can hope for..." may be closer to today's market structure reality than we'd like to admit.
Does this guy really care that his execution was a few cents worse than it could've been?pic.twitter.com/SzAjrtNrJl
Or this guy? Does he care that he'd only be down -85.19% instead of -85.21%?pic.twitter.com/IBA12W97eR
I'm not saying everything is perfect. There are currently no roadblocks between a gambler and the markets, and that needs to change. Brokerages need to be more stringent about margin & options account applications & addictive app UI needs to change.
At the end of the day though, if CrazyApe69 wants to gamble his life savings on $TSLA weeklies against everyone's warning, who are market makers to stop him? Whether it's Citadel filling his order, or Virtu, or an exchange, does it change anything about what CrazyApe69 wants?
My opinions on this topic are still evolving - pushback is more than welcome. I'll be diving more into this debate in this Friday's newsletter - sign up below so you don't miss it:https://frontmonth.substack.com/
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