Reginald Smith of the Bouchet Franklin Institute asks whether high frequency trading is causing the structure of the stock market to change. Purely intuitively, it must be. Website Zero Hedge suggests that

"the direct and increasing involvement of HFT is a de-evolutionary process that is leading to increasing market fragmentation, self-sameness, destabilisation and volatility, offset merely by allegedly improved liquidity, which incidentally disappears on a moment's notice when the negative side-effects of HFT overwhelm the positive, such as was the case on May 6.. the type of fractal recursive feedback loops inspired by increasing HFT participation lead to spikes in correlation: Correlations previously only seen across hours or days in trading time series are increasingly showing up in the timescales of seconds or minutes.."

Whatever putative benefits are generated to other market users by HFT in terms of improved liquidity are likely to be outweighed by the potential negatives, not least the irrefutable fact that computers, lacking common sense, will execute trades that no rational human would ever consider. This surely leaves the stock market more dangerously prone to self-organised criticality with the potential for unlimited downside risk - a condition best compared to sand grains being dropped onto a table, one by one. Eventually, the sand pile reaches a stationary "critical" state after which any new grain added to the pile could conceivably trigger an avalanche of indeterminate scale. The possibility of avalanche is forecastable, but the identity of the specific sand grain (or computer-driven instruction) that will induce it is not. Mary Schapiro, chairwoman of the SEC, herself told a congressional subcommittee that

"Automated trading systems will follow their coded logic regardless of outcome, while human involvement likely would have prevented these orders from executing at absurd prices."

The stock market is a complex eco-system that houses a multitude of investor types. Until comparatively recently, individual investors predominated. Now institutional investors preponderate. There are agency risks to the latter, but the role played by HFT participants requires greater study in the interests of market stability and investor protection. The market should not be a playground for robots. Nor can there be any public interest served by allowing flash traders preferential access to incoming market orders in return for a fee. It's called front running and it's supposed to be illegal.

David Fuller's view Fullermoney has posted numerous articles, reports, email comments and at least one excellent video on high-frequency trading (HFT). To access these, use the 'Search' facility shown upper-left, between 'Chart Library' and 'The Chart Seminar'. Search under 'high frequency' and also 'high-frequency', for 12 and 23 entries, respectively.

I agree with the many criticisms of HFT and maintain that it is a dangerous and sometimes predatory practice. I also suspect that it is a major factor behind the 'risk on' and 'risk off' one-way traffic that we often see. I cannot think of another cause for the increasing correlation between stock market and commodity trends that we have seen in recent years.

Here is Tim Price's letter from the previous week.