"At first blush, it appears high-frequency traders have done...

"At first blush, it appears high-frequency traders have done what market observers generally like, which is increase the amount of trading going on at any given time (what traders call volume) and the ease with which someone can buy or sell a given security (commonly known as liquidity). Basically high-speed traders add to the overall action in a market, which, at least theoretically, is supposed to make markets more accurate and efficient.

But not everyone agrees that the thousands of extra trades per second that some computer algorithms are executing are actually all that good for the market. In a recent paper titled, “The Dark Side of Trading ,” Emory University accounting professor Ilia D. Dichev argues that while some high-frequency trading can be beneficial, the scope of high-frequency activity in the market today — which accounts for up to 70% of all trades by some estimates — has drowned out the input from more traditional investors who partake in good-old-fashioned “fundamental” analysis of companies, i.e. the analysis of financial statements and business plans.

When only a small minority of market participants are trading on actual information about the companies they are buying and selling, and the rest are trading on what computer programs think about those participants actions, the market can become unmoored from fundamentals, more volatile and less efficient.

Perhaps even more problematic, high-speed trading systems may also pose risks to the stability of the overall financial system"



Read more: http://business.time.com/2012/08/08/high-frequency-trading-wall-streets-doomsday-machine/#ixzz22y8ArH4r