COWEN: Why are there bid-ask spreads at all, and is it possible to get rid of them … if we’re asking, “What could economics teach us that would help us more?” I would think a better theory of bid-ask spreads is one of the big gaps.
BUTERIN: Absolutely.
COWEN: Because even sunshine trading, where you would think the information asymmetry would be away, there’s still a bid-ask spread. It may be lower, but not as much lower as you might have thought.
Why is Tyler Cowen skeptical of bid-ask spreads? I feel like there are a bunch of good reasons they should exist.
For one, adverse selection–as Vitalik says, “if someone is willing to take my offer, then that by itself is evidence that my offer could be mispriced.”
For another, even if, as he mentions, you preannounce your trades and make it clear that you’re an uninformed trader, just the fact that someone wants to buy something makes it worth more, and the fact that someone wants to sell something makes it worth less, because of supply and demand.
For a third thing, if someone wants to sell a share of Apple stock, it doesn’t make sense for me to buy it at the exact fair price without charging anything. I didn’t want to buy a share of Apple when I woke up today, I don’t particularly want it now, and if I buy it I’ll have to hold onto it and eat up capital and the risk of Apple going down until I can get rid of it. (Does Tyler Cowen want to offer a pick’em market for all stocks at all times?)