High-frequency trading, HFT, instructs computers to exercise buy and sell orders in response to real-time market and news events. Because such rapid-fire, algorithmic trading is estimated to account for 70 percent of all equity trades, many fear that means HFT dominates equity pricing. Some claim HFT has turned the market into a casino in which fund managers and individual investors will invariably lose out to faster computers.
The fact that HFT accounts for a large share of daily trading does not mean it moves stock prices. Prices move in response to marginal changes in the bid and ask of prices, not in response to sheer volume. Big price moves generate big volume, not the other way around.
The common fear that HFT might generate massive, arbitrary gyrations in stock valuations is based on a fundamental misunderstanding of what these trading strategies are all about. The point of high-frequency trading is to react very quickly to tiny price changes in either direction —not to make big bets on big price changes in one direction. The plan is to observe and arbitrage (lean against) minute, temporary wiggles in stock prices in the hope of making a few cents on each share.