[Nwallins]

> However, the other counter argument against HFT is that it actually doesn't really provide liquidity to the market, as evident by the June flash-crash.

As far as I can tell, this is the only argument presented against HFT.

> But HFT dealers stopped trading that day, triggering a lot of people's stop-market orders

Are there other factors involved in this outcome, or is this a canonical HFT failure?

[Dilpil]

On the topic of the Flash Crash:

Arguing that HFT is bad because people sometimes stop doing it abruptly kind of suggests that HFT is good when people are doing it.

[noname123]

> As far as I can tell, this is the only argument presented against HFT.

The argument is that HFT provides liquidity precisely when traders don't need it. You need broker/dealer to step in and take the other side of the trade when someone wants to trade and there isn't anyone else willing to trade. The issue with HFT is that, as the predatory example provided above, that HFT is actually buying up your liquidity in the market and selling it back to you at a higher price. Specifically, most HFT prop shops deals in ETB (easy to borrow) stocks such as GOOG, AAPL, & BAC where tens of millions of shares are traded daily. These securities don't need liquidity broker/dealers, as there are already tons of true buyers and sellers out there. Are there any HFT dealers in penny stocks or small caps where some liquidity would be much needed? Nope.

> Are there other factors involved in this outcome, or is this a canonical HFT failure?

Nope. The reason a lot of dealers stopped trading that day were tactical. A lot of stat-arb prop shops got burned during when Bear collapsed, one black box decided to sell everything which cascaded another black box to sell everything, which cascaded to everyone wanting to dump everything. So from that experience, HFT shops decided to not hold any positions beyond seconds and shut down everything when market crashes seriously. So they provide liquidity when the market is doing well, but when the shit hits the fan, self-interests also hits in and the "liquidity-providers" head for the hills.

[yummyfajitas]

Are there any HFT dealers in penny stocks or small caps where some liquidity would be much needed?

False. There are long tail funds, I believe tradebot works on the long tail (among many others).

The thinly traded stocks have better spreads and less competition, which means there is money to be made.

Incidentally, most HFT firms stopped trading on may 6 due to a fear of broken orders. If you buy at 5, sell at 10, and the market goes up to 15, you could wind up losing $5 on a short position if your buy order is broken. Unfortunately, broken orders are impossible to predict algorithmically, since humans came up with the criteria for order breaks hours later.