January 19, 2010
The problem with HFT is that they act according to their own wishes, irregardless of the fundamentals (profits/losses, news, etc) of any particular stock. Volume can be manipulated for purposes unknown to the average stock trader and executed at speeds that leave no time to react.
Because of this, HFT can ignite or fuel a rally, drawing in slower trade platforms and then having reached a predetermined level, suddenly sell into the rally. Without warning, the prices plummet and the slower trades wind up having the floor pulled out from under them. There are no fundamentals driving this, just HFT making the decisions and reaping the benefits because it is faster and drives perceptions rather than reacting to actual information.
Those who claim HFT provides liquidity are clouding the issue. HFT actually cuts out the individual investor, leaving the markets in the hands of professional gamblers with the odds in their favor. Then it's just a question of which gambler can outmanuver the other one. The average small investor is chum in the water
This is not the way the market is supposed to work. Stocks are supposed to be valued based on the company. Better company, better value. Instead we have trading in companies that are so far in excess of the P/E ratio and valutions that "gambling" is the only term I can think of outside of "massive bubble".
The winners of HFT are not the companies or the "average" investor. It is the bank or trading platform with the best algorithim that suckers the others into following it's lead, up or down, and then backs off as others pile in. Call it "bait and switch" or "shell game" or whatever, the outcome is the same. Come up with the Best platform backed by enough capital and you win. In some cases, HFT's even get paid for just playing, win or lose. Talk about your win-win situations.