Thus, much of the confusion around HFTs derives from a complicated market structure that makes perfectly legitimate behavior seem predatory to the uninitiated. Most of the rest is attributable to a problem of convoluting the types of players involved in our complex market ecosystem and misunderstanding how they interact.
Retail investors have accounts at brokerage firms. Brokerage firms generally get their customers' orders executed by sending them to market makers known as order flow internalizers (e.g., Knight Trading). The internalizers usually pay the brokers for this"order flow." Brokers do this for a variety of reasons, which mostly boil down to lower operating costs and higher profit margins. Note that sophisticated brokers (e.g., Goldman Sachs) build internalization capabilities for themselves — it is profitable enough to warrant the investment.
The internalizer, having acquired inventory from the retail customer, now turns to the exchanges to unload this inventory. Internalizers needn't be particularly fast in providing liquidity: they have plenty of time to deal with customer orders. Internalizers care about being fast only when they are trying to unload those positions to HFTs and other market participants on the exchanges. Thus, the orders that are done on the exchanges, where HFTs trade, are almost entirely devoid of any retail participation. Traders who face off with HFTs, then, are neither moms nor pops. They're professional traders working for Wall Street, in all likelihood.
Read MoreNYSE floor trader blasts high-frequency trading
I do not believe that the U.S. equity market is perfect. But it's the most cost-effective equity market in the world for a retail or institutional investor, and it's a better market today than it's ever been before.The kinds of improvements that need to be implemented are mostly incremental: making the NBBO real-time, enforcing rigorously against any unfair advantage given to any participant, getting rid of the ban on zero-spread (i.e., locked) markets. These changes will improve transparency and reduce complexity.
Internalization of order flow, and other off-exchange transactions (such as those done in dark pools) also warrant close inspection. There are legitimate and interesting concerns about conflicts of interest, free rider problems and market integrity that need addressing. But these issues have nothing to do with HFT. So, even as we strive for improvements, we should try to understand that we have never in our history seen a more level playing field in any equity market.
And tell me this: Why are we OK with the myriad advantages Warren Buffett enjoys over every retail investor (and most professionals)? Is this not evidence of a two-tiered system, not at a microsecond timescale, but on a much grander and more impactful one?
Rishi K Narang is the founding principal of T2AM LLC, a hedge-fund advisory firm located in Los Angeles. He was also co-founder, with his brother, Manoj Narang, of the high-frequency trading firm Tradeworx. He is the author of "Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading." Follow him on Twitter at