[yummyfajitas]

...they're exploiting flaws in the way trades clear to front-run them and become unwanted middlemen.

Could you explain the mechanics of how this works?

Near as I can tell, the only way to become a "middleman" is to offer a better price than your competitors or to offer the same price at an earlier time. Is there a "front-run my competitors" FIX command I'm not aware of?

[prodigal_erik]

http://blog.themistrading.com/wp-content/uploads/2009/01/tox... describes a predatory algorithm deliberately making inconsequential trades solely to discover a buyer's limit, then selling short at that limit only to cover after the dip they themselves caused. This is basically scalping, a strategy designed to steal the surplus value from both the buyer and seller. Such abuses were even more egregious back when most exchanges offered flash orders, which is more like poker with certain players allowed to see your cards.

When a HFT buys and sells with a holding time in milliseconds, they are in no way guiding the correct allocation of our economy's resources, they are merely bleeding those who are. That they can do so profitably is showing us what we should fix about the way trades clear.

[yummyfajitas]

Huh. So basically, before HFT, the clever institutional trader could use HFT techniques to buy a bunch of shares from less sophisticated retail investors at $20.00 in spite of high demand.

On net, the institutional trader is gaining $0.01 at the expense of retail investors.

Now, in a world with professional HFTs, the institutional investor can't do this as easily and must pay the retail investors $20.01. How horrible!

It's hard to see why you are calling the HFT an "unwanted middleman". I mean sure - the institutional investor would love to keep taking money from the retail investors. But the retail investors want to keep their pennies - they certainly want the HFT to be present.

As I said, the only way to become a middleman is to offer a better price than your competitors.