That [speed] edge, Saluzzi [of Themis Trading LLC] claims, has made high frequency traders the new insiders on Wall Street, and he says he spots signs of predatory behavior every day. Saluzzi, who trades large blocks of stock for institutional investors, says the supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines. He calls them parasites who exploit a technological advantage to suck money out of the market and add no value.
Three hundred years ago, 'traditional' London exchange traders were at a disadvantage when one outfit constructed semaphore towers that reported "inside information" of which ships wre heading to harbor. Almost two hundred years ago, 'inside' shipping information was delivered to some traders in Philadelphia via telegraph reports from New York. Every advance in information technology has been associated with returns to entrepreneurs who exploit it. Those who did not, have always cried 'unfair' and 'predatory.'
Is there any social value to this trading? Ever decreasing transactions costs of trading means that trades on ever smaller bits of information become profitable. This means that prices, which are seen by all, better reflect the available information - information usually gathered by those 'insiders.'
Leibowitz [of the New York Stock Exchange] and other proponents of high frequency, high speed computer trading say it has performed a valuable function: tripling volume, reducing stock spreads and transaction costs, and providing liquidity to the markets.
"Liquidity means that if you want to buy or sell a stock you could do it right away, and you could do it at a fair price. That's what liquidity means. And without short-term traders, there is no liquidity," Manoj Narang [of Tradeworx] explained.