You believe HFT is bad because it makes swing trading and day trading unprofitable?!? Fun fact: they aren't unprofitable, since the algorithmic traders you criticize are swing trading and day trading. It sounds like your complaint is simply that machines do a better job than you.
Concering micro-arbitrage, if you don't notice 1/4 second price inconsistencies, you also won't notice if computers resolve them in 1ms rather than a fast fingered human resolving them in 1/4 sec. The money is being extracted regardless, the only difference between now and the past is that a geek with a computer beats the fast fingered frat boy. That's bad if you were the human trader, but who else is harmed?
Front running is illegal and has been for a long time. I'm also not sure how you think HFT traders do it - do you think HFT firms have trojans which alert them when your mouse is hovering over the "place order" button at etrade?
I'm really curious how you believe HFT will "eat away at your margins" if you make long term value investments. If you believe apple will go up 20%, do you really care about the $0.01 spread? Even if you care, how can the HFT guys make money off you if you place an ALO order? Could you explain the mechanics?
I think HFT is bad because it substitutes "create value" for "game the system".
I won't miss the .01 that much, but if they do it a billion times.. they still didn't create anything. They just extracted money from the system while producing zero value.
EDIT: As far as who's being hurt? All of us. Smart people should be creating value, not playing silly parlor games against each other for money. We're all missing out by making a video game more profitable than creating things.
I actually agree with you on the component of HFT/speculation in general that is fighting over the distribution of profits rather than creating profits (i.e., beating other traders to the punch); this creates no new gains. Of course, once we reach the point where most of HFT/trading is fighting over distribution of profits, we've reached the point where it is barely profitable. Presumably smart people will start exiting in droves at that time - I certainly plan to do so.
But I suspect that the transition to HFT over human market makers/daytraders is a net gain even with regards to smart people creating value; isn't it a good thing to have 3 geeks writing programs to replace 100 daytraders? (Based on your previous comment, I assume you agree with me that profitable day/swing trading does create value.) In general, isn't replacing lots of humans by a few smart people + machines a good thing?
Well, if we're down to the portion of HFT/speculation that's extracting gains rather than contributing to the economy, we've made it pretty far.
As far as robots running the stock market -- I don't know. Frankly, I'm inclined to be awfully conservative about the stock market at present. If you told me we were going backwards 5 years in technology and there'd be way less money made on the stock market, I'd probably be ok with it, for a few reasons.
1) Frankly, I'd rather be conservative on cutting edge approaches to stock pricing for a little bit.
2) To my mind, the stock market doesn't exist to enrich participants, it exists to efficiently distribute capital. Enriching participants is good motivation, but it shouldn't be legalized gambling and game playing. If an unreasonable share of that capital is going to the console cowboys rather than being distributed to companies and investors (not traders), then something's wrong there. I'm not sure if we're at that point but I don't like the trend.
3) As I said upthread, I don't understand the gains for the economy as a whole of smoothing out the price curve in the sub-second range. I really don't. Anybody who's going to spend a lot of money on something takes more than a second to make up their mind, right? They probably had to get it budgeted and everything. So the subsecond trading on, say, commodities seems to me to be at the expense of actual purchasers of commodities. The gains have to come from somewhere, right?
In general, I'd settle for slower, dumber and less profitable day traders if the upshot is less risk to the system, greater portions of investment gains going to grandma and a more deliberately moving stock market. I'd be fine with that state of affairs, despite my general drive towards futurism on anything else.
I don't understand the gains for the economy as a whole of smoothing out the price curve in the sub-second range.
I'll make it simple for you. There are none.
HFT traders as a whole make no gains from trading in microseconds as opposed to milliseconds or even seconds. If an investor wants to buy 100 shares right now with a spread of $0.02/share, market makers will earn $2.00 over the next few seconds. The only question is which market maker will earn the $2.00, and the answer is whoever is fastest.
Trading fast doesn't increase profits, all it does is redistribute them. Of course, one HFT firm could also outbid the rest, lowering the spread to $0.01/share and allowing the retail investor to pay only $1.00. That's why competition among HFT firms is good.
But you are correct that all the effort put into lowering latency (rather than improving trading strategies) is a deadweight loss to society.
Concering micro-arbitrage, if you don't notice 1/4 second price inconsistencies, you also won't notice if computers resolve them in 1ms rather than a fast fingered human resolving them in 1/4 sec. The money is being extracted regardless, the only difference between now and the past is that a geek with a computer beats the fast fingered frat boy. That's bad if you were the human trader, but who else is harmed?
Front running is illegal and has been for a long time. I'm also not sure how you think HFT traders do it - do you think HFT firms have trojans which alert them when your mouse is hovering over the "place order" button at etrade?
I'm really curious how you believe HFT will "eat away at your margins" if you make long term value investments. If you believe apple will go up 20%, do you really care about the $0.01 spread? Even if you care, how can the HFT guys make money off you if you place an ALO order? Could you explain the mechanics?