What surprises me is that it seems that this is a "new" thing. I thought front-running has been known for years.
Dark pools sound more worrisome though, one loses transparency through them.
Choice titbits from the article where algo-trading will "help the little guy":
- [...]high-frequency trading has morphed into a technology arms race.
- Making it in high-frequency trading these days requires the latest technology. Lots of it.
- [..]a big chunk of high-frequency profits derive from jumping into markets before small investors can.
Good luck, retail investor.
I call HF traders "un-sponsored" because most exchanges formalize this responsibility. For example, becoming an official market maker on the CME requires that you make a continuous market in the instruments you trade. For this, an "official" market maker is given special price treatment and other benefits.
Market making has been around forever, and is a required function of orderly markets. Generally, the more market makers you have the better: liquidity goes up, spreads go down. HF traders, being unofficial market makers, are making these markets without either the special responsibility of making a continuous market OR the benefits that go along with it.
It is suprising to me how little most folks understand about the functioning of markets. For example, if you have ever placed an order to Sell 100 shares of CSCO at 75.25 Limit then you are doing two things: (1) you're offering an option to someone else to buy--the compensation you receive is known as the spread; and, (2) you're prioritizing price over immediacy. If you remove the price from this order, and simply Sell 100 shares of CSCO at Market then you are: (1) purchasing an option from someone, in this case someone who has placed a Buy Limit order--the price you pay for this option is the spread; and (2) you're prioritizing immediacy over price.
In the first case, the case of the limit order, you are making one side of a market. Congratulations, you're a market maker; however, if you only continue to make a one sided market you'll go out of business quickly because you're inventories will either sky rocket (you'll own too many shares) or it will plummet to 0 -- this is bad for market makers. The goal of making markets is volume and speed because, if applied correctly, you can achieve a balanced inventory which is the goal of market making. Inventory == risk, and therefore it has to be balanced to the level of risk a given market maker wants to take.
Please don't make statements like, "Good luck, retail investor", when you don't fully understand what's happening. HF traders have nothing to do with credit-default swaps or under-capitalized mortgages. They do, however, make the markets you want to participate in more efficient.
Anti-GS scare-mongering and global conspiracy theories aside, it's fairly clear that only the really large players (Getco, GS, Renaissance) stand to make clear benefits from HFT. But that's alright - they're entitled to, if they figure out how. What is also clear is that the casual retail investor is getting screwed by HFT, and will never realise it.
CDS and krap mortgages were strawmen, so I'm not going there. I am curious to know though - do you have your fingers in algo trading in some manner (trader/programmer)?
I am not currently involved in high-frequency trading, but I did stay at a holiday inn express last night. :) Seriously though, I know several folks who are, I've followed the industry for a long time, and market micro-structure is a very interesting topic to me. But, why does that really matter, anyway?