An April 2012 report from Morgan Stanley, meanwhile, concluded that institutional orders are having a much larger impact on asset prices now than prior to 2007. A common HFT strategy is to execute a trade at the volume-weighted average price of the day. Morgan Stanley found these strategies could now only handle 4-5 per cent of daily volume without causing an adverse price impact, compared with 10-15 per cent in the earlier period. The bank attributes this to the sharp decline in natural buyers and sellers in the market as HFT has come to dominate daily trading volume.

There are, of course, studies that show HFT lowers spreads and volatility, although, (as Mr Lauer told the Senate Banking Committee), some of these have been commissioned by high frequency trading companies and cannot claim to be independent. The essential point, however, remains that empirical evidence for the claimed efficiency advantages of HFT is far from clear cut.

Other industry practices create fleeting volume but add little to liquidity. These include layering, in which a false impression of a stock's liquidity is created, and quote stuffing, in which large orders are put into the market and then quickly withdrawn, flooding the market with quotes to slow down rivals with inferior computer systems.

The most worrying aspect of HFT liquidity, however, is that it can evaporate instantly such as during the flash crash of May 2010, when the US equity market lost $1tn in value in a matter of minutes and then just as quickly recovered. During the crash high frequency traders withdrew their orders from the market and liquidity disappeared, because there is no obligation for them to make a market.

David Fuller's view Greedy exchange officials love high-frequency trading (HFT) because it now dominates their markets and is therefore also their biggest revenue producer. This is very short-sighted because HFT has driven away much of the traditional institutional business, not to mention private investors and traders.

The additional and often explosive volatility caused by HFT is the worst example of casino capitalism and this computer-driven trading is also accident prone as the FT article points out. Although regulator attention has focussed mainly on HFT in stock markets, its influence is increasingly apparent in commodities, as I have pointed out before. Look at these intra-day transaction charts for gold, silver, platinum and palladium today. Such moves now occur on most days but they were extremely rare until a few years ago.

Here is a related article by Christopher Matthews for Time Business: Are Average Investors Getting Bilked by Wall Street Supercomputers?


See also: High Frequency Trading: Wall Street's Doomsday Machine?