Is the NYSE lying about high frequency trading?

http://blogs.reuters.com/felix-salmon/2009/07/29/judging-high-frequency-trading/
I don’t think that case is proven, although again the term “liquidity” is vague enough that it’s important to be able to define terms here. I think the important sense of liquidity is not narrow bid-offer spreads, but rather the ease of doing big deals at the market price, and/or the ability to buy or sell stock without moving the market. In that sense, HFT hurts, rather than helps: every time anybody tries to buy anything, the predatory algos try to pick them off. If that makes people more reluctant to trade (”if you don’t like it, you can trade yourself at much lower frequencies”, says Cowen) then that ultimately hurts price discovery and transparency.

My bottom line is that HFT is a black box which very few people understand, and that one thing we’ve learned over the course of the crisis is that if there’s a financial innovation which doesn’t make a lot of sense and which is hard to understand, there’s a good chance there’s systemic risk there. Is it possible that HFT is entirely benign and just provides liquidity to the market? Yes. But that seems improbable to me.

http://www.nytimes.com/2009/07/24/business/24trading.html

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

http://zerohedge.blogspot.com/2009/07/toxic-equity-trading-order-flow-on-wall.html

http://rick.bookstaber.com/2009/04/arms-race-in-high-frequency-trading.html
....high frequency trading is embroiled in an arms race. And arms races are negative sum games. The arms in this case are not tanks and jets, but computer chips and throughput. But like any arms race, the result is a cycle of spending which leaves everyone in the same relative position, only poorer. Put another way, like any arms race, what is happening with high frequency trading is a net drain on social welfare.

We usually do not think about trading in terms of social value, but trading often does have social value, and it should. The objective of trading is to provide liquidity to the market, and to make sure that prices best reflect all available information – the usual efficient market argument we all grew up with. The solution? How about having everyone agree to standards in terms of hardware and related configurations. A high-frequency arms limitation treaty. We could call it HALT.