For those of you who are interested, ZeroHedge has an excellent “HFT 101” post. As the post notes, HFT has been around for quite a while in other, less extreme, forms:
Ironically, while some form of HFT has been around for a long time, its true “potential” was first revealed in October 1987 with the first whole market flash crash, which resulted from an exponential propagation of program trading, which like right now with HFT, nobody truly understood. And even though some thought that Black Monday would have taught traders and regulators a lesson, it merely accelerated the incursion of computerized and algorihmic trading into regular markets, to such an extent that HFT now accounts for nearly three quarters of all exchange-based trading volume, while dark pools and other “off exchange venues” – or more markets that are not readily accessible to most – account for up to 40% of all total trading by volume up from 16% six years ago.
So the bottom line: HFT is legal frontrunning… but also so much more. In fact, like the TBTF banks, HFT itself has become so embedded in the topological fabric of modern market structure, that any practical suggestions to eradicate HFT at this point are laughable simply because extricating HFT from a market – which indeed is rigged but not only by HFTs at the micro level, but more importantly by the Federal Reserve and global central banks at the macro – is virtually impossible without a grand systemic reset first. Which is why regulators, legislators and enforcers will huff and puff, and… end up doing nothing. Because if there is one thing the TBTF systemic participants have, is unlimited leverage to collect as much capital due to being in a position of systematic importance in a market, rigged or otherwise.
Finally, if push comes to shove, and the fate of HFT is threatened, watch out below, because if HFT’s presence, glitchy as it may have been, led to the May 2010 flash crash and the subsequently unstable market which has exhibited at least one memorable crash every single month, then the threat of pulling the marginal trader which now accounts for 70% of all stock churn and volume (if certainly not liquidity) would have consequences comparable to the Lehman collapse.
The last point may be a bit hyperbolic, but this article is as good a place as any to start to understand HFT and its impact on today’s markets.