Does high frequency trading (HFT) punish long-term investment?
No, at least not noticeably so. The majority of what HFT does is to take advantage of the fact that there is a spread between buy and sell orders on the exchange, and to instantly fill both orders, gaining relatively risk-free profit from some inherent inefficiencies in how the market prices stocks. The end result is that intraday trading of the non-HFT nature, as well as speculative short-term trading will be less profitable, since HFT will cause the buy/sell spread to be closer than it would otherwise be. Buying and holding will be (largely) unaffected since the spread that HFT takes advantage of is miniscule compared to the gains a stock will experience over time.  For example, when you go to buy shares intending to hold them for a long time, the HFT might cost you say, 1 to 2 cents per share. When you go to sell the share, HFT might cost you the same again. But, if you held it for a long time, the share might have doubled or tripled in value over the time you held it, so the overall effect of that 2-4 cents per share lost from HFT is negligible. However, since the HFT is doing this millions of times per day, that 1 cent (or more commonly a fraction of a cent) adds up to HFTs making millions. Individually it doesn't affect anyone that much, but collectively it represents a huge loss of value, and whether this is acceptable or not is still a subject of much debate! I disagree strongly with the other two answers posted thus far. HFT are not just liquidity providers (in fact that claim is completely bogus, considering liquidity evaporates whenever the market is falling). HFT are not just scalping for pennies, they are also trading based on trends and news releases. So you end up having imperfect algorithms, not humans, deciding the price of almost every security being traded. These algorithms data mine for news releases or they look for and make correlations, even when none exist.  The result is that every asset traded using HFT is mispriced. This happens in a variety of ways. Algos will react to the same news event if it has multiple sources (Ive seen stocks soar when week old news was re-released), algos will react to fake news posted on Twitter, and algos will correlate S&P to other indexes such as VIX or currencies. About 2 years ago the S&P was strongly correlated with EURJPY. In other words, the American stock market was completely dependent on the exchange rate of two currencies on completely different continents. In other words, no one knows the true value of stocks anymore because the free market hasnt existed in over 5 years. "Not really. High frequency traders affect mainly short term investors. If everyone invested long-term and traded infrequently, there would be no high frequency trading. For a long term investor, you by at X, hold for several years, and sell at Y. At worst, high frequency trading may affect ""X"" and ""Y"" by a few pennies (and the changes may cancel out). For a long term trader that doesn't amount to a ""hill of beans"" It is other frequent traders that will feel the loss of those ""pennies."""
I'm no expert in this, so this is a legit question.  Are 401Ks and pension plans considered HFT or buy &amp; hold?  If HFT, would exception rates be beneficial?  Or would we want to encourage those groups to reduce frequency as well? "Algorithmic trading doesn't necessarily require live feeds. It is a very generic term describing trading based on the decisions made by a machine and not a person. One very prominent type of algo-trading is ""high frequency trading"". For HFT to be effective, not only do you need live feeds (which are provided by the exchanges electronically), you need them before others get them. That's why HFT traders put their machines as close as possible (physically) to the exchange data centers, sometimes even renting racks at the same datacenters from the exchanges themselves." I would say the most challenging fact for this assertion is that HFT firms operate with extremely limited capital bases. For a stock with say 10m shares ADV, even a very large and successful HFT strategy might use a position limit of no more than 5000 shares.  That is to say if you sum up and net the buys and sells for a stock across the day the HFT firm will never exceed 10,000 shares (2x position limits assuming it completely flipped) on a stock that trades 10,000,000 shares on a given day. The high volumes are attained through high turnover, the strategy might trade up to 500,000 shares (or 5% of the volume) attaining a 50x turnover.  But that brings me back to the original point. In the market microstructure literature market impact generally has been found to scale linearly or even sub-linearly for net volume executed.   If I alternate between thousands of 1 lot buy and sell orders, it would be very difficult for me to move the market because the market impact of every one of my buy orders roughly cancels the market impact of my almost exactly equal number of sell orders.   There might be a higher-order mechanism at work, but I'm genuinely curious what you think it might be. How could strategies that attain such small net positions have such out-sized impact on market direction? Say a stock is listed in Nasdaq, and the same company has a stock listed in Tsx. Does the Nasdaq price affect the Tsx price as trading commences? Not directly. Basically, an exchange is a market, and the price is defined only by supply and demand in that market. However, any substantial price differential for a commodity traded in multiple market creates an arbitrage opportunity, and there are many traders whose job it is exactly to find and use such opportunities. Their activity in turn has the effect of reducing the price differentials to the point where transaction costs make them unprofitable. With high-frequency traders around, the time for a price differential to disappear is nowadays measured in milliseconds. If a trader buys from one exchange, will it affect the price of the other? Only through the mechanism mentioned above.  Are there any benefits to being listed in two exchanges? It increases the liquidity of a stock. "What you are saying is a very valid concern.  After the flash crash many institutions in the US replaced ""true market orders"" (where tag 40=1 and has no price) with deep in the money limit orders under the hood, after the CFTC-SEC joint advisory commission raised concerns about the use of market orders in the case of large HFT traders, and concerns on the lack of liquidity that caused market orders that found no limit orders to execute on the other side of the trade, driving the prices of blue chip stocks into the pennies.  We also applaud the CFTC requesting comment regarding whether it is   appropriate to restrict large order execution design that results in   disruptive trading. In particular, we believe there are questions   whether it is ever appropriate to permit large order algorithms that   employ unlimited use of market orders or that permit executions at   prices which are a dramatic percentage below the present market price   without a pause for human review So although you still see a market order on the front end, it is transformed to a very aggressive limit in the back end. However, doing this change manually, by selling at price 0 or buying at 9999 may backfire since it may trigger fat finger checks and prevent your order from reaching the market.  For example BATS Exchange  rejects orders that are priced too aggressively and don't comply with the range of valid prices.  If you want your trade to execute right now and you are willing to take slippage in order to get fast execution, sending a market order is still the best alternative." What you're describing is called timing the market.  That is, if you correctly predict when the market will drop, you can sell before the drop, wait for the drop, then buy after the drop has occurred.  Sell high, buy low. The fundamental problem with that, though, is: What ends up happening, on average, is you end up slightly behind.  There's quite a lot of literature on this; see Betterment's explanation for example.  Forbes (click through ad first) also has a detailed piece on the matter. Now, we're not really talking HFT issues here; and there are some structural things that some argue you can take advantage of (restrictions on some organizational investors, for example, similar to a blackjack dealer who has to hit on 16).  However, everyone else knows about these too - so it's hard to gain much of an edge. Plenty of people say they can time the market right, and even yourself perhaps you timed a particular drop accurately.  This tends to lead to false confidence though; how many drops that you timed badly do you remember? Ultimately, most investors end up slightly down when they attempt to time the market, because of the transaction costs (if you guess two drops, one 'right' and one 'wrong', and they have exactly opposite gains/losses before commissions, you will lose a bit on each due to commission), and because of the overall upward trend in the market (ie, if you picked at random one month a year to be out of the market, you'd lose around 10% annualized gains from doing that; same applies here). All of that aside, there is one major caveat: risk tolerance.  If you are highly risk tolerant, say a 30 year old investing your 401(k), then you should stay in no matter what.  If you're not - say you're 58 and retiring in a few years - then knowledge that there's a higher risk time period coming up might suggest moving to a less risky portfolio, even at the known cost of some gains. Again, I don't have the answers, but it seems to me as though the value of stock in a company should be directly correlated somehow to the real world value - what it holds in assets, the demand for its services or products.    And when you see IPOs of tech stocks with prices exponentially greater than their revenues, or derivatives that when unravelled are nothing but air, or intraday fits and runs that seem to be tied to nothing in particular, then it all starts to look like nothing but manipulation.  Maybe you're right, there's nothing wrong with HFT and a tax on it wouldn't add stability, I can't say.  And if you explained it, I must not have understood.  But I don't think its wrong for people to consider the current (or past) instability undesirable and try to think of solutions. I was never trying to prove that negative returns are good. They are devastating for HF, much more than for long only houses (in a downmarket).   My issue is people on Reddit comparing HF performance to S&amp;P. The article talks about the comparison as well.