[Retric]

Market makers can have actual value by reducing bid/buy spread.

However, I don't think reality supports the idea that HFT are adding real signals to the market. HFT software has little understanding of the 'world' so they add noise which reduces signal. Taking the markets further from reality.

See: flash crashes. They don't actually have anything to do with the wider economy just feedback loops devoid from reality.

PS: Some software is designed to automatically read and interpreted news, but they often get it wrong moving the market in the wrong direction.

[yummyfajitas]

Flash Crashes also have no effect on the wider market. When you look at end of day prices for various stocks and indices, there is only a single symbol where you can actually see the effect of any flash crash:

https://www.chrisstucchio.com/blog/2012/flash_crash_flash_in...

Also, HFT lowers the price for people who do have information to trade with it. In this way, while HFT adds little information of it's own, it does enable better information transmission.

[Retric]

In other words in the short term can and will distort the market. So, the question becomes do they discover a economically meaningful price in the short term or is the processes essentially random.

As to lowering the price, arbitrarily increasing or decreasing the price is not an economically useful activity. The value of markets is price discovery, at best HFT reduce transaction costs though this is somewhat debatable as they are extracting money from somewhere.

[yummyfajitas]

You should read the article to see which symbol actually displays the effects of HFT shenanigans by end of day. (Hint: it starts with K, and it deserved everything it got.)

To see how cheaper liquidity directly enables speculators, read the section "Why Speculators Need Liquidity" in this post: https://www.chrisstucchio.com/blog/2012/hft_apology2.html An example is worked out in detail illustrating the point.

Also, HFTs are extracting far less money than the humans they replace. So if extracting money is what you want to prevent, congrats.

[mrchicity]

This paper studies the effect of a high-frequency market maker entering the Dutch stock market: http://www.amf-france.org/technique/multimedia?docId=workspa...

The trader they study reduced the bid/offer spread and trades 80% passively (he is primarily providing liquidity in the order book for others to trade with). His limit orders are more informative about "hard" news such as changes in the index future price than other traders, meaning he tries to buy stocks that are cheap and sell those that are expensive relative to the overall market, steering them toward their correct prices. This is just a simplistic HFT from almost a decade ago, modern prop traders have teams of researchers building prediction models with many more inputs.

And for all that, he earns a realized spread of 0.72 basis points, before paying for computers and employees. 1 basis point is 1/100 of 1%. That's in 2008, a time when HFT was relatively new and competition was less fierce, margins are considerably lower these days, not like making 0.72 basis points is exactly robbing widows and orphans to begin with. No human would make a market for such low margins, no human could react nearly instantaneously to changes in the index/stock prices to set his quotes, and no human could trade hundreds of stocks at once.

How do you think HFTs cause flash crashes? If you look at the middleman's net position on page 3, he never accumulates more than 10000 shares in one direction, and his position mean reverts every few minutes. How could a trader who primarily trades passively (others choose whether to elect his orders sitting on the book), never accumulates a significant directional position, quotes both buy and sell prices on the order book, and who aims to flatten his trades relatively quickly (whatever selling pressure he could create is quickly turned into buying pressure after he's given a short position) have such a large impact on prices?

I don't think trading off news feeds is a typical HFT trade. Some market makers may use these feeds to get out of the way during announcements. Maybe it's an automated trade for hedge fund types, but it's a high-risk, high-reward infrequent type thing. If a trader is incorrectly predicting prices long enough, they'll lose money and go out of business.

[chipsy]

The crucial aspect is the "crunch per bit" of HFT. We know that an electronic system is mostly an improvement over having pit traders yell at each other all day.

What we do not know and cannot prove without experimenting is whether our electronic markets benefit from following smarter, more complex rules of play instead of the same ones faster.