First, they allow firms and households to hedge a variety of risks, a considerable benefit when volatility is costly. Second, they make it more feasible for investors to fine tune the risk-return profiles of their portfolios. The concomitant reduction in risk premiums required by investors should reduce capital costs for all economic agents.
Third, risks once held within the four walls of financial institutions are converted into tradable securities and distributed and dispersed to a broader base of institutions and interests. Liquidity and financial innovation have also led to a conflation of the roles played by financial intermediaries, themselves. Intermediation has moved increasingly to financial markets and away from regulated bank institutions.