It’s a potential “doomsday machine.” It’s “quite literally out of control.” Hedge fund managers and Nobel winners say it should be banned. Others insist it should at least be regulated. Its practitioners are “parasites.” Mark Cuban says they are “the ultimate hackers,” who “scared the hell out of me.”

Last week they wiped out $440 million of Knight Capital’s capital. Earlier this year they messed up Facebook’s IPO. A couple of years ago they caused the Dow’s 1,000-point flash crash. And everyone’s horrified by that GIF making the rounds. Yes, it’s the bête noire to end all bête noires; high-frequency trading.

The only problem here is that I don’t really see the problem.

Oh, I’m not saying high-frequency hackers are saints. And the claims that they improve market liquidity don’t seem to hold water. But:

as long as small investors only trade in or out of each position only once a or just a few times a year, [losses due to HFT] are often less than the losses they may have incurred from higher trading commissions as little as 10 years ago.

An apparently damning ZeroHedge interview with a high-frequency trader is defanged at the end by the very same point:

You can mitigate this risk by being patient with your orders. If you enter a limit order and it isn’t hit in the first hour, don’t impatiently move it. Stand your ground. That way, you can dictate the price you take, even in the midst of all the HFT noise.

So who are high-frequency hackers hurting, exactly? Not Warren Buffett-style buy-and-hold investors:

Most of the vocal critics of HFT are short-term day trading types – why? Because computers are better at arbitraging away the small price differentials those guys live off of. [HFT] does not serve a social benefit, but the people it is taking money from also don’t really serve a social benefit.

argues one MetaFilter contributor, convincingly. And that Knight Capital blowout? Apparently that’s just what you get when you accidentally release your test code into the New York Stock Exchange. Live by the sword, die by the sword:

Still, you have to admire the HFT hackers’ sheer chops.

Source: TechCrunch