InvestorQ : How exactly does trading add value to the markets?
Siya Saran made post

How exactly does trading add value to the markets?

Anu Biswas answered.
3 years ago

Have you ever imagined the trading market without traders? You will find limited liquidity and the impact cost of your trades could be really huge. That is the second aspect pertaining to trading. While it is clear that trading is not a zero sum game due to its asymmetric nature, the bigger question is does trading actually add value to the markets or does it just shift money from one trader to another? Trading does add value for 3 reasons. Firstly, it enhances liquidity in the market and enables the process of price discovery. As we stated in the beginning of our response it is hard to imagine a market without any traders giving liquidity support. Secondly, trading reduces the bid-ask spreads which makes the market safer and also enhances institutional and retail participation. Bid-ask are the gap between the sell price and the buy price which eventually determines your basis risk in the market. Lower the basis risk, the better it is and this is ensured by the traders who provide liquidity. Lastly, trading is a very good method for capturing short term trends in the market, which eventually cumulate into longer term trends. We all know that the long term trend is nothing but the summation of a series of short term trends. Trading enables to catch these trends and make profits even as we move in and out of the market.