[cwkoss]

How is mispriced markets a problem? If institutional investors are buying and selling at roughly the same rate, and the mis-pricing occurs in either direction, there will be more noise, but over time it would balance out. Sometimes you'll pay 1% too much, sometimes 1% too little, but it would balance itself out in the long run.

Am I missing something here?

[rramdin]

Not really missing anything, but if you're willing to accept buying/selling 1% away from the "ideal" price, it's hard to complain about an HFT making a penny because you can't back-off when the market is moving.

[harryh]

Your assumption about institutional investors buying and selling at roughly the same rate is wrong. When one firm decides that Microsoft is overprices, a lot of firms are probably going to decide the same thing. Then it's a race to see who can extract the most value out of the market before the price corrects.

[dsacco]

> Am I missing something here?

Yes. By paying relatively small amounts to high frequency market makers in return for enhanced liquidity and price discovery, you won't be overpaying by 1% (or more). I also challenge the idea that it would just "balance" itself out, in the absence of evidence supporting that thesis. In actuality you'd likely just amplify the costs you already have and either fill fewer trades or have higher costs for doing so.

Choosing to lose $1 due to low liquidity instead of a few cents due to market makers is both petty and nonsensical. There are legitimate arguments against HFT, but they don't begin by trying to reinvent economics such as to de-emphasize optimal price discovery.