Furthermore, critics point out that HF traders can gouge investors who place market orders. We've probably all experienced buy or sell orders that were filled at some price that seemed out of whack with whatever the stock was doing on that particular day. HFT could be to blame, some say. And the heist takes place in a legal area that is very grey indeed.

Steve Hammer, founder of HFT Alert, explains:

"[Fluttering] is not enough time to get an execution. It's illegal to put in a phony bid or a phony offer but that's what's happening. HFTs create in essence financial spam, which increases the latency in the system and allows them to push prices in one direction or the other. People seeing lots of volatility in a stock who put in market orders are giving the systems license to steal. If they can cross the market and lock the spread for a fraction of a second, they can take out any limit order above or below that price, resulting in a very brief, wide swing in the price of that stock, 5-6% in a single second, even though if we're looking we see no change whatever in price or spread, yet here come all these trades through that are outside the spread at that point in time."

Another claim is that HFT is destroying the futures markets, i.e., those with a legitimate need for hedging are seeing their positions blown up by high-frequency manipulators who cause such volatility that the hedgers are forced into unnecessary margin calls.

Wherever the truth about HFT may lie, the tempest it has caused was bound to generate some new regulations, and it has. A recent SEC proposal would eliminate one controversial tactic of high-frequency traders: the "flash trade," in which exchanges alert designated traders to incoming orders. Critics call it a variation of front-running, an old (and illegal) practice that involves traders buying and selling in advance of large orders.

Nasdaq, meanwhile, announced a new policy in March, under which it will charge its members at least $0.001 per order if their non-marketable order-to-trade ratio exceeds 100:1. (Non-marketable orders are those posted outside the national best bid and offer.) The fee will be limited to those individual market participants that send in at least one million orders per day, although market makers will also be exempted, even though some market-making firms are considered HFT shops.

David Fuller's view Since the dawn of markets in their myriad forms several millennia ago, there has never been a shortage of people who attempt to game them. These wide boys range from the fruit and veg street vendor who displays the good stuff but serves customers from the back, to the smooth talking opportunists in financial centres. Early conmen gave rise to the Latin caution: Caveat Emptor (Let the buyer beware) to which investors should also add: Let the seller beware.

High-frequency algorithmic trading (HFT) is just the latest and most sophisticated form of securing an advantage over the other guy. Like the atom bomb, HFT is testimony to mankind's inventive genius, although most of us would say that developing the former, while inevitable, was not necessarily a good idea. Investors and especially traders are rapidly coming to the same conclusion about HFT.

Proponents of HFT will point out that it comes in various forms and that not all of them are predatory. Well, they would say that, wouldn't they? HFT cannot be put back in the box and tech boffins everywhere are trying to write even cleverer algorithms in an effort to shoot down the other guy. It is just like computer games, except that it is undermining confidence in the markets.

The most noticeable consequence of HFT is the increase in intraday volatility, which is seldom fundamentally driven. Instead, high-speed computers are looking for orders placed by other traders and investors, both large and small. By instantaneously placing and removing thousands of bids and offers, practice called 'fluttering' or 'pinging', they can identify clusters of other people's orders, and then either trigger or front-run them to their advantage.

I have described this practice as analogous to large factory ships that rely on acoustic sonar and sounders to detect schools of fish - that's you, me and everyone else. But don't just take my word for it. A subscriber has thoughtfully provided Fullermoney with the highly informative insights of a genuine expert in HFT.

This is one of the best reports on high-frequency trading that I have seen. Long-term investors need not be overly concerned, as I have said before, although one has to accept that higher average intraday volatility is here to stay. This is particularly apparent in commodity futures markets, where the turnover is considerably lower than in forex. The evidence suggests to me that commodity trading today is a more risky activity than in earlier decades. I would be surprised if those of you who have been trading futures for more than twenty years did not agree.

(Note: this is the 73rd comment on HFT in Fullermoney over the last few years. To see the others, use the 'Search' facility shown in the menu upper-left, fourth item down, then just type high-frequency in the box provided and hit the blue 'Search' tab.)