High Frequency Trading

Remember the "flash crash" back in May, 2010?  Thousands of stocks suffered unbelievable drops and recoveries in a matter of minutes.  No one knew what happened.  How could thousands of stocks completely disconnect from fundamentals?  The SEC looked at that question with this report and it seems to largely boil down to a lack of liquidity.  high frequency traders keep telling us that they serve the market by providing liquidity—well, guess what?  It wasn't true; not only didn't they provide liquidity, they exacerbated the situation by reversing long positions they were temporarily holding and pulling back their bids and offers.  The SEC has taken steps to prevent another "flash crash," but high frequency traders are trading more and more, up to 60% of trading in some stocks.  It's not so clear that this trading is helping or hurting the market overall.  Please see Thompson Reuters here, a WSJ article here or this opinion piece here for a lot more information.