There is a lot of philosophizing over whether HFT harms or helps the market, etc. Much of the pro camp centers around liquidity, but as someone else mentioned, much of that liquidity is absorbed by offsetting HFT.
Rather than get lost in all of the gnarly details, however, I think it is easier to simply look at the purpose of the market and ask whether HFT serves or harms that purpose. IMO, it is pretty clear that it represents a hijacking of the market's true purpose and functioning in the service of that purpose.
For example, is it helpful in setting a price which reflects true supply and demand that we have algorithms designed specifically to manipulate the pricing mechanism by creating artificial supply and demand. These algorithms place phony orders, never intended for execution, but instead merely to trigger a move from the other side. How can that possibly be helpful to such a fundemental market mechanism as pricing?
HFT uses the market for an entirely different purpose. Anyone who defends it must acknowledge this point and argue that the purpose is good if they wish to defend HFT honestly. Otherwise, to couch pro HFT arguments in terms of it being supportive of the market's true purpose and functioning is to mislead.
I assume that such a simple question is intended to allow its author to make a point. So, perhaps we can skip the dance and get right to what your point is?
Else, if you really are unaware of the market's purpose, perhaps you can spend a little time on Google. There is much available information online that you might find helpful in answering your question.
What perplexes me here is the enthusiastic response received for the development and deployment of bitcoin mining hardware (for which the motive is giving a hardware edge to people in order to make lots and lots of money) versus the condemnation of HFT (for which the motive is giving a hardware edge to people in order to make lots and lots of money). Both cases require a significant outlay of resources and talent and I have respect for the work that went into each.
And this gets at a bunch of people, including yourself, claiming that HFT somehow defeats the "purpose of the market(tm)." But if I look this up on Wikipedia, I get the notion that it exists to help corporations raise money and secondarily to provide an indicator of the general economic mood. I fail to see how HFT goes against this. That said, I'd support everything Mark Cuban suggested short of the trading tax (because I believe (without proof) that it would have unintended negative consequences far beyond HFT).
Mark Cuban aside, I mostly see various people who, to quote an Amazon review of "Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio", sound like the reviewer's grandparents explaining why they don't use computers. No hard proof - just lots and lots of fear-mongering.
So much so that I'm starting to believe that the underlying issue here is resentment and jealousy that they didn't pull these hacks off themselves and walk away with the big bucks.
Finally, how is HFT worse than the "good old days(tm)" where major brokerages all had seats on trading room floors from which they could manipulate the bid/ask spread with impunity? I'd counter that it's actually better now that anyone capable of getting the cash and talent upfront can get into the same game that's been played since the very beginning, except that the pace is continually accelerating and those left out in the cold are succumbing to future shock. Buffett knows how they'll deal with the events preceding an actual Singularity(c) if one occurs.
But that's just my opinion, feel free to disagree.
Ah, now there's an honest response. Thanks for the thoughtful reply.
I'm not sure why the comparison between bitcoin and HFT, however. My admittedly limited knowledge of the former informs me that the purpose of using compute intensive operations to mine bitcoins is to prevent arbitrary creation by limiting the number and means of creation, thereby attributing value to bitcoins.
I will allow that my understanding could be off by some degree but, in any case, there is no comparison. There is nothing in the design, purpose, or function of the market that is served by accruing advantage to whomever simply has the best hardware. Hence, I am really missing the leap that "well, if it works for bitcoin it should work for anything". The market is designed for economic purposes such as raising capital and allowing broader participation in the economic output of society via investment opportunities. To see how counterproductive HFT is to these purposes, one need only take it to the extreme. That is, what if all transactions were performed by HFT algos? Would the market continue to serve its purpose and function the same? Or would it simply become some strange self-serving system that benefits an entirely different group with entirely different agendas and objectives? How would an IPO even work in this scenario?
Now, going back to the point in my original post, one can argue that the new system is better or fairer, or whatever. But one cannot honestly argue that it is the same or, worse, better serves its current purpose due to HFT.
Your argument that HFT is no worse than the good old days is a straw man, so there's not much I need to say there. I will add though that whether spreads, prices, etc are manipulated by major brokerages or "anyone capable of getting the cash and talent up front", it does subvert confidence in the market and its core mechanisms.
1. I don't understand bitcoin mining but that's no obstacle to rendering a negative judgment on a comparison between building bitcoin mining farms and building an HFT firm.
2. The market is designed for raising capital and HFT is deleterious to that purpose.
So, looking at the market today, GOOG is 772, AMZN is 264, FB is 29, ZNGA is 3, and LNKD is 126. Sounds like they're raising capital to me. What am I missing?
3. I'll just dismiss your comparison of HFT profiting from bid/ask spreads to the previous roll of pit bosses doing the same thing as a straw man. And then I'll close with an unsubstantiated claim that HFT has reduced confidence in the market because it's obvious(tm).
Now I'm assuming that because Mark Cuban has wisely decided against investing in markets he doesn't understand that you're reasoning that no one understands the market?
Which to me is as much poppycock as the belief that the market is %100 efficient 100% of the time (for if so, there would be no housing bubbles, no dotcom booms, and more recently, no fiscal cliff chaos and witness http://en.wikipedia.org/wiki/Renaissance_Technologies which whose performance would be effectively impossible if so).
Might I propose an alternate path from futilely fleeing the event horizon of this mini technological singularity? Instead of saying "I don't understand HFT so it's bad" why not use the same physics currently in use to understand the ensemble behavior of 10^23++ molecules to derive higher-level trading strategies? It's worked in the past (http://en.wikipedia.org/wiki/Didier_Sornette) and I have no reason to believe it cannot be made to work again (which means to me that smart people are already working on it or have already figured it out).
" So if I can make a dollar or more per share with a .16 risk, why do I care about HFT's? They might even help me if they decide to move the price up a few pennys when Im close to my profit target and they may hurt me if I was a few pennys away from the stop.(all my stops are in my head, never manually till close to the target or stop. And even then I may sell at market if last 2 moves were upticks. Ithink HFTS hurt the other greedy scalpers and market makers and specialists and whatever goniff's are swimming around looking for a quick edge. But how would they hurt the buy and hold value investor who lets say buys AAPL at 100 and knows its going way higher and doesnt sell till its at 500. Who got hurt. Maybe a penny in slippage somewhere. Irrelevent to the long term player and even to me, the shorter term player. Its the scalpers that get hurt and they supposedly are providing liquidity anyway so their job is done. How do I get affected?"
It's hard to get to the meat of your arguments because they are riddled with logical fallacies. You seem to be trying to wedge as many in as possible.
Regarding your itemized "summary":
1. You seem to forget that YOU are the one asserting the validity of YOUR comparison between HFT and bitcoins. So, the onus is on YOU to prove it. So far, you have failed. Beyond that, I simply stated that I am no bitcoin expert. But, I believe my summary of bitcoins was sufficient and relevant to draw the distinction. If it wasn't, then you should have explained how I missed the mark and why that miss is relevant to your argument.
2. Are you kidding? So the fact that there are people who have cancer but not yet died from it proves that cancer is good for you? I mean your argument here is literally: HFT exists; there are stocks that are doing well; therefore HFT cannot be harmful. Wow.
3. You introduced the straw man. Don't blame me for noticing. As for much of the rest of the stuff you wrote, I never said it.
Ditto the Mark Cuban stuff. Not sure why you invoke him or the question of understanding the market for that matter. Likewise with the 100% market efficiency comment. I never referred to any of that. How many straw men are we up to now?
You do a really good job of arguing with yourself, but you fail to address my original point. Your talk about bid/ask spreads does at least address market mechanisms, but even if we were to accept all of the great wonders that HFT does for spreads at face value, that is a far cry from rebutting my OP, as spreads are but a small part of the picture. In fact, it is so insignificant to this discussion, let's call that one a red herring.
I also noticed that you left my example in the extreme completely untouched. Wise decision.
In any event, you joke about my not offering evidence, but the irony is that much of this actually is self-evident. For instance, who do you think is sitting on the other side of the trade when HFTs profit? I won't ask you to buy my trademarked brand of common sense this time though: http://www.nytimes.com/2012/12/04/business/high-speed-trades...
That's an actual study, not an Amazon review from some random "day trader". BTW, it is slightly hilarious that you referred to that review as "evidence".
Rather than get lost in all of the gnarly details, however, I think it is easier to simply look at the purpose of the market and ask whether HFT serves or harms that purpose. IMO, it is pretty clear that it represents a hijacking of the market's true purpose and functioning in the service of that purpose.
For example, is it helpful in setting a price which reflects true supply and demand that we have algorithms designed specifically to manipulate the pricing mechanism by creating artificial supply and demand. These algorithms place phony orders, never intended for execution, but instead merely to trigger a move from the other side. How can that possibly be helpful to such a fundemental market mechanism as pricing?
HFT uses the market for an entirely different purpose. Anyone who defends it must acknowledge this point and argue that the purpose is good if they wish to defend HFT honestly. Otherwise, to couch pro HFT arguments in terms of it being supportive of the market's true purpose and functioning is to mislead.