[ConfuciusSay]

When people point out that HFT's seem basically like a giant high speed frontrunning operation, as the OP did, the usual counter is that it's all fine and dandy, because they provide liquidity. Indeed right above your reply, is someone replying saying exactly that. Therefore the question of HFT's providing liquidity, or not, is very germane to the question, and if you're willing to be skeptical about what the Fed is saying regarding HFT's, then surely you would be similarly skeptical about what CNBC or Vanguard is saying, or would that go against your confirmation bias?

[kasey_junk]

Most critics of HFT rely on three major arguments:

1) It is a front running operation.

2) It has no "social benefit".

3) It increases volatility or structural instability.

Items 2 & 3 are not germane to the question of "it is a front running operation".

My response to item 1 is simply, no it's not. If you state it is, then either you have an unclear understanding of how market mechanics work, or a specific natural opposition to HFT systems. When the OP said that HFT "insert themselves into transactions", I really wanted him to clarify if he meant "insert" in the sense that he thinks they can change a standing order based on new orders before they execute, or the more general sense of "inserting themselves" that any middleman does in any commercial transaction. That is, as an expert in sourcing/warehousing/etc items that have varied demand curves.

Your response (and the fed's part in it) seemed to muddle the responses to items 2 and 3. My answer (and the common one) to item 2 is that it provides liquidity cheaper than the prior regime. That is largely not debated, though it is an open question of whether you could provide the same liquidity even cheaper within some other environment (batch auctions etc).

The question of whether HFT contributes to high volatility vs acts as a response to it is much more nuanced and I suspect unanswered/unanswerable, but the problem with the Fed specifically speaking to it, is that the Feds own actions are at the heart of the question as well. A given bank or investment fund service is unlikely to have the systematic impact of the Fed.

Finally, notice that the Fed did not speak to whether HFT lowers the cost of trading (ie item 2) they only spoke to the volatility question. So using the Feds statements as a counter to the argument that HFT lowers the cost of trading does not work.

[ConfuciusSay]

My interpretation of his "insert" comment, was that of 1). My response to that was to preempt the common refrain of HFT defenders who universally trot out the "liquidity" defense.

As for the criticisms focusing on volatility vs liquidity, to me they are linked, because in those instances of flash crashes that are the target of the recent criticisms, the issue has been that volatity increases due to HFT algorithms withdrawing from the market (i.e. reducing liquidity).

Also, there are other criticisms of HFT's beyond those three, including the "coincidence" that HFT firms seem to be responsible for most of the major order spoofing. Regulators have been VERY slow and uneven about enforcing HFT spoofing, but are finally catching on, albeit with slaps on the wrist (excluding Citadel being banned in China).

[kasey_junk]

Is that an argument against HFT though? That the regulators aren't doing a good job was true in the previous regime.

I'm some what receptive to the argument that HFT makes the laws harder to enforce, given that the laws rely on "intent" which is murky with algos, but how do we square that in the face of any innovation?