Quote from FerdinandAlx:
Liquidity provision is the result of credit expansion not of production. If I place my order at the bid I don't actually produce anything or provide a service in the traditional sense. Nor do I see any reason why my order would contribute anything to the total sum of knowledge, when it might as well substract from it. The argument that information is contributed that more accurately reflects true value seems awfully contingent to me.
I agree that markets are essential to a scociety but it's because they are the natural result of property rights. Without the right to buy and sell there really is no private property. I deny though that speculation creates anything meaningful to society at large. It doesn't have to either since it follows from the right to private property. That in itself should be a sufficient argument to validate speculation.
Liquidity provision can exist in a barter system, so your point about it being dependent on credit expansion (or even credit at all) is incorrect.
If you own an asset and want to sell it urgently, would you not prefer to be able to sell it fast for close to the current market value, rather than take 1 year to sell, and possibly at a 10-20% discount to the market value? If the answer is yes, then liquidity is valuable to you, it is worth something. A non-physical good that is of value (such as legal advice, the motivation of a fitness trainer, or language instruction) is called a service. Thus, liquidity is a service.
The service you are providing as a speculator/liquidity provider is the ability of owners of assets to convert them into cash more quickly and at a more competitive price than if your liquidity was not there.
As for informational value, I did not say that all traders provide that. In fact, many substract information, by making bets that have nothing to do with future value (e.g. trading on tips, BS technical signals etc). That's why (elsewhere IIRC) I said that long-run *profitable* traders contribute informational value. Because they are profitable, each trade on average will be expected to make money, thus the future value of stuff the buy is more than randomly likely to be higher than the current market price. Thus their buying of the asset pushes the price closer to where it should be and therefore improves market efficiency & price accuracy.
That's the theoretical argument. If you are more of a pragmatic hands-on person than abstract thinker, simply go and transact for a while in some illiquid markets (e.g. low-priced 3rd world residential real estate, antiques, or lumber futures), then transact in
liquid markets. Tell me whether you find liquidity useful, as an owner/dealer in those markets. Let me know if you think that price transparency and information is superior in the illiquid or the liquid markets. If your experience is anything like mine, you will quickly come to appreciate the benefits of liquidity and price discovery on a visceral level, because they will save your arse time after time - both when you are right (allowing you to transact quickly and cheaply) and when you are wrong (sending price signals, and allowing quick exit from bad investments).
I agree about the moral argument for speculation. However, since many people don't believe in rights or freedom, I think it's important to demonstrate the utilitarian argument for markets too. Especially since even most free market supporters and traders have no clue whatsoever as to the social effects or benefits of markets & speculation.
