The financial infrastructure in America and, to a certain extent, in Europe, is so complex and sophisticated that its benefits are often lost on people outside of the industry (and, for that matter, plenty within it). The failings of derivatives, for instance, can become a political talking point to argue banks are evil and predatory while also being a risk to social stability, but the reason those derivatives exist and their social benefit gets lost in the conversation. Commodities exchanges, for example, do not exist simply to make speculators rich (especially since few speculators do). Rather, they have a fundamental and crucial social function: to provide liquidity.
Liquidity is essential for anyone in any industry. Having access to cash to make investments and to fund businesses is how companies can operate and deal with problems such as lag time between invoicing and bill settlement. The commodities exchange of Chicago was originally developed to help farmers get access to capital; before that, they relied on loan sharks who charged usurious rates for short-term loans.
This is still the case in much of the developing world, where 20% interest rates on short-term small loans is common, and such large returns as well as the illegality of these markets invites organized crime. Mafia-controlled loan sharks are a fundamental and accepted part of many markets in the developing world, and these predators can and are disintermediated by more complex financial markets that help get farmers access to capital and make it easier for money to change hands.
This is where market makers come in. Often seen as a predatory force in themselves, market makers essentially make it possible for an entity holding an asset to trade that asset with another entity. As a third party, market makers are compensated for making this deal in a variety of ways, and over time the profits of market making decline as markets grow in size and sophistication. But they are the first and crucial step to transition from a predatory to a well-functioning financial market.
Market makers and the speculators who operate within markets will obviously make mistakes, and those mistakes can be extremely costly. The MBS-driven financial implosion of the late 2000’s is the most recent example of such a failure. But those are not common—and the benefits of creating a liquid real estate market through MBS’s is very visible—just look at home ownership statistics in America versus other countries (and, arguably, the decline of derivative-driven housing markets has been a factor in the unaffordability crisis in American housing today).
While market making sounds predatory and unfair from the outside, a historical point of view demonstrates how important market making and secondary markets are—even if they are hard to explain or articulate to people outside of finance. Arguably, one way to help alleviate poverty in emerging markets would be to create more markets where cash can flow and the poor can access capital more cheaply and more easily.