Editing Speculation (section)

===Market liquidity and efficiency===
If any market, such as [[pork belly|pork bellies]], had no speculators, only producers (hog farmers) and consumers (butchers, etc.) would participate. With fewer players in the market, there would be a larger [[bid/offer spread|spread]] between the current bid and the asking price of pork bellies. Any new entrant in the market who wanted to trade pork bellies would be forced to accept this [[market liquidity|illiquid market]] and might trade at market prices with large [[bid–ask spread]]s or even face difficulty finding a co-party to buy or sell to.

By contrast, a [[commodity]] speculator may profit from the difference in the spread and, in competition with other speculators, reduce the spread.  Some schools of thought argue that speculators increase the liquidity in a market, and therefore promote an [[efficient-market hypothesis|efficient market]].<ref name="chicagofed.org">{{Cite book |last=Heckinger |first=Richard |title=Understanding Derivatives: Markets and Infrastructure |date=August 2013 |publisher=Federal Reserve Bank of Chicago |edition=Revised |chapter=Derivatives Overview |chapter-url=http://www.chicagofed.org/-/media/publications/understanding-derivatives/understanding-derivatives-chapter-1-derivatives-overview-pdf.pdf |archive-url=https://web.archive.org/web/20221012041520/http://www.chicagofed.org/-/media/publications/understanding-derivatives/understanding-derivatives-chapter-1-derivatives-overview-pdf.pdf |archive-date=12 October 2022}}</ref> This efficiency is difficult to achieve without speculators. Speculators take information and speculate on how it affects prices, producers and consumers, who may want to hedge their risks, needing counterparties if they could find each other without markets it certainly would happen as it would be cheaper. A very beneficial by-product of speculation for the economy is [[price discovery]].

On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, and prices may become distorted.<ref name="chicagofed.org" />