The Financial Times published a well thought through analysis on high-frequency trading and its impact on traditional and retail investors here... William Gibson's quote could be used to summarize the essence of HFT: "the future is already here, it's just not very evenly distributed".
Wikipedia defines HFT as - "High-frequency trading is the execution of computerized trading strategies characterized by extremely short position-holding periods". Computerized strategies implies simple to complex algorithms and extremely short positions can mean micro seconds to ones that are never executed but are noise generators.
A quote from Kevin Cronin, Head of Equity Trading at Invesco stated: "Because of the predatory nature of some participants we have no incentive to post liquidity,” ... “There are 40 places where stocks are transacted and none of us has clarity of supply and demand on most [equity] issues. These are fundamental issues as to what the value of a securities market is".
Mr. Dharm Kapadia, who has advised The RBR Group (my company) on technology in the financial sector explained that:
"Inexpensive co-location has facilitated the growth of high-frequency trading (HFT) and will continue to support it in the future as computers and networks will only get faster. The individuals participating in HFT not only take on, and beat the big players, but also evade the regulatory agencies. All you can see is their "vapor trails" in the historical trade and quote data. The retail investor is miles behind the HFT participant; they're not normally going to get the best execution in this type of environment. Ubiquitous technology will allow the HFT trader to be faster, more nimble, and hard to trace."
Of course, within this macro-trend of explosive growth of HFT - the democratization of technology, and its power and speed will enable the astute fund management companies in retail investments to begin constructing a premier service that will become consumer grade in this coming decade. And the first one of these services to market will generate aggressive premiums prior to the arrival of competition.
Interestingly today the Financial Times front page includes the article "High-frequency trades earn fine" here. Excerpt from the article:
"US regulators are to fine a high-frequency trading firm, signalling sharper scrutiny of this type of activity, amid a broader crackdown on market abuse following the May 6 “flash crash”.
The enforcement action, brought against a small New York firm for “layering”, will be settled on Monday with the payment of about $2.3m in fines and disgorgement penalties, according to people familiar with the situation.
Layering involves traders entering multiple fictitious orders, which are then cancelled within seconds. The strategy is used to drive a stock price up or down, before using a real order to profit from the artificially inflated or depressed price.
It is one of the high-frequency trading techniques – alongside “spoofing”, in which traders feign interest in stocks to drive the price up or down – that some believe may have played a part in the 20-minute period of wild price gyrations on May 6 known as the “flash crash”."