Following the release of Michael Lewis’ book Flash Boys, the role of “middlemen” in the marketplace has come under scrutiny.
The fact is, our financial markets have always had “middlemen” coordinating trades between market participants. Even 20 years ago, these middlemen were part of an exclusive group of floor traders that closed off access to average investors. However, thanks to investments in technology and high frequency trading practices, in recent years middleman have reduced transactions costs and improved access more than ever before for the average investor.
As FIA EPTA Vice-Chairman Mark Spanbroek explains in a new blog post, middlemen provide an extremely valuable role in today’s market structure, especially for end investors, much like other industries:
While it is true to say that technology, particularly the internet and digital communication, has radically reshaped the way we all do business (not just in the financial markets), it would be wrong to say that middlemen are no longer needed. Certainly there are fewer middlemen, supply chains have been simplified, and the number of links between the two ends of a purchasing chain have shrunk, to the great benefit of all those concerned at the ends of the chain; yet very rarely can we do away with the middleman completely.
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Similarly, whereas once we had to go to a travel agent to be able to book a holiday, now we can simply go online, looking for the best possible deals for our flights, hotel, car hire etc. There are far more competitors for this business, with individual and aggregated / comparison sites (middlemen), as well as the ability to book directly from the airline or hotel (no middlemen at all), cutting out the need to pay travel agent’s fees. The travel agent still exists, but more and more of their business is to provide a combined version of these services online, or to provide a custom-made holiday plan for a more comprehensive package.
The internet has reduced the cost of many day-to-day consumer purchases, by replacing middlemen with cheaper alternatives (often due to greater competition) and in some cases removed them completely, bringing customers into contact with the manufacturer. And while this has changed the way we do business, accepting the new technology as part of our everyday lives brings a lot of benefits and keeps us primed for future innovation.
Spanbroek rightfully argues that “the rise of algorithmic trading has cut out a lot of middlemen in the markets” thereby “enabling more participants to connect directly to the exchange.” Investors have also benefited from the competition between traders utilizing algorithmic trading strategies, since “those who remain have had to find new, more cost-effective ways to provide their service.”
The advancements in technology in today’s modern markets should be embraced by all market participants and preserved to keep costs low for end investors. Read Spanbroek’s entire blog on FIA EPTA’s website here.
