Friday, September 01, 2006

Alas, higher fees at TS. Does liquidity go up or down? take my 2 weeks of vacation (one highlight of my visit is pictured), read a bunch of smart posts by Diem, only to find out that the cost of trading at TS has just gone up. Now this in itself will reduce liquidity, but incentives have been shiftily shifted, so that winners pay (increased) expiry costs, and price takers pay increased trading costs ... but only in-game.

Fees for taking prices before the game have been eliminated. A big negative reaction from high volume traders and in-gamers found on this thread, and understandably so.

But I think there's a shot for liquidity to increase, as the costs are all back-ended both into time and into the winners, which should draw more trades and larger pre-game positions, as well as more newbies, whose losses will be a little less painful. It's one of those bets that only someone with access to TS' audited financial statements could settle, though. Here was my 2 cents:

. . . I agree that the expected value of each contract's return has become more negative by 2 cents. It is a minimum 0.4% inflation. Of course that is a disincentive, but frankly, the only way for fees to be reduced for us is if a worthy competitor to TS steps up and we are compelled to move our business to them.

Other than that, I believe that the market equilibrium will recalibrate to adjust for the payout scheme. More so, I believe that, since winners will be subsidizing losers, more newbies would come in, and they would last a little longer. And as long as the winners are still winning, they won't quit trading.

Finally, while liquidity in-game could be markedly reduced, liquidity before the game could be increased greatly. People would not be guaranteed to lose 4 cents everytime they took a price. They could thus move in and out of contracts in greater volume, and if larger resultant positions were established before the game, then TS wins.

I still think that multiple market makers would be the best way to improve liquidity. The Nasdaq model is superior to the NYSE model.

No comments:

Post a Comment