So you'd prefer a single market-maker to control price discovery rather than have several parties compete to do the job?
You can argue that /liquidity/ is fine if you have a small number of market-makers but price discovery (otherwise known as "value") is something altogether different.
To put it another way, I can get all the $8 hotdogs and $12 beers at Yankee stadium I like. The liquidity is fine but the VALUE isn't.
1) There often isn't any sort of ideal price to discover at short timescales, just complicated interplay between HFT algorithms and the bizarre psychology of human traders (ie, "4th digit nearing zero, looks like it has momentum!"); both moving prices in ways unrelated to any fundamental value.
2) Just as no one is forced to do their weekly shopping at Yankee stadium, investors can choose which exchange to submit their orders to. Exchanges with shoddy market makers would lose customers.
1) You couldn't be more wrong. Moment by moment psychology is and had been a part of the market from the beginning. The market is about INFORMATION, namely who knows something and who doesn't. Adding computers to the mix might have sped things up but hasn't fundamentally changed the game that's played.
2) I dont see any fundamental difference between multiple exchanges each with a dominant market marker and multiple market makers within a single exchange. In practical matters, retail investors dont select their exchange, their broker does.
You can argue that /liquidity/ is fine if you have a small number of market-makers but price discovery (otherwise known as "value") is something altogether different.
To put it another way, I can get all the $8 hotdogs and $12 beers at Yankee stadium I like. The liquidity is fine but the VALUE isn't.