I think people forget how much front running happened in the bad old days on the stock market floor, how the NYSE organized a cartel that kept trading prices high, and that the bid/ask spread is usually a lot less than it used to be.
One thing people don't say much about HFT is that the HFT practitioners got the exchanges to add undocumented order types that let them, in some cases, take advantage of people who do limit orders as the author of this post describes. The best description of this is at
Often when I trade stocks I like to set a limit order at a price that might be a percent or so better than the market rate. Since the price fluctuates, odds are pretty good that I'll get my fill. Now if it is just the normal Brownian motion, it's a good thing that I get my fill, but if the stock is getting hammered by an external event that is driving it way down I might have hit the limit for the wrong reason and be unhappy I got the fill. In situations like that, HFT traders have an advantage with their special order types.
I think the normal retail investor who buys and holds for a while is not hurt terribly by HFT and flash crashes(unless the market is depressed because of the fear of HFT) but you can definitely get burned if you use stop orders. If a price goes down quickly, that can trigger your stop order, causing you to sell at a bad time.
One thing people don't say much about HFT is that the HFT practitioners got the exchanges to add undocumented order types that let them, in some cases, take advantage of people who do limit orders as the author of this post describes. The best description of this is at
http://www.amazon.com/The-Problem-HFT-Collected-Frequency/dp...
Often when I trade stocks I like to set a limit order at a price that might be a percent or so better than the market rate. Since the price fluctuates, odds are pretty good that I'll get my fill. Now if it is just the normal Brownian motion, it's a good thing that I get my fill, but if the stock is getting hammered by an external event that is driving it way down I might have hit the limit for the wrong reason and be unhappy I got the fill. In situations like that, HFT traders have an advantage with their special order types.
I think the normal retail investor who buys and holds for a while is not hurt terribly by HFT and flash crashes(unless the market is depressed because of the fear of HFT) but you can definitely get burned if you use stop orders. If a price goes down quickly, that can trigger your stop order, causing you to sell at a bad time.