

How much "market liquidity" is too much? - JumpCrisscross
http://www.quora.com/Financial-Markets/How-much-market-liquidity-is-too-much

======
PaulHoule
I don't think "too much liquidity" is the problem any more than "too fast
transactions" are themselves a problem.

Fundamentally it's better to complete a trade in an hour than a day, better to
complete it in a minute than an hour and better to complete it in a second.

Customers won't directly notice the benefit of a trade that 's faster than
0.2s, but would-be market makers need to trade very quickly today because if
they don't make the trade somebody else will.

What is a problem is when HFT causes the market to be unstable. When all of a
sudden P&G is down 30% for no good reason. When they have to halt trading in
certain securities, etc. That's the actual problem.

Now there's a related question which has got nothing to do with fast trading,
which is "is there too much capital?"

For a while I've thought that investment returns across most asset classes
have been poor lately because there is more capital in the system than the
system is able to productively use. Because you can't find good returns
elsewhere, people buy mortgage-backed securities, and because all the good
borrowers already have mortgages, they've got to go subprime. Interest rates
are driven crazily low because people in China can't or won't spend the money
they make.

It could be the cure to our financial woes could be the disappearance of 70%
of our capital but the problem is whose 70% percent?

