As an idiot Savant, who clearly has experience in mis-understood behavior, here is my take on the impact of HFT trading on the equity market:
According to some estimates, high-frequency trading by investment banks, hedge funds and other players accounts for up to 70% of all trades in U.S. stocks. Apparently this was true as far back as 2007, and interestingly at that time, the new dominance of borg trading was also being praised for its significant contribution to much higher trading volumes on the exchanges. Yet, what I find puzzling, is that I constantly hear that today's trading volumes are way below the norm of the past 5 years, and is steadily decreasing year over year. What gives? If the HFT borgs have added volume, where is it? It's not like they are less prevalent in today's market. If anything, with the incessant advances in technology, and programing methodology, there should be more of them, and accordingly more volume. Yet oddly enough, the volume on the NYSE continues to decline. That leaves only one other possible explanation, and that is that the other 30% have left the building entirely. Apparently, we Slopers still valiantly trading against the borgs, are now close to extinction.
Perhaps, this lack of volume, combined with the dominance of the HFT borgs explains why the tape acts as it does. I closely watch each tick go by all day long. It seems so utterly automated to me now, almost void of any human character. The direction of the tape is obviously difficult to predict, yet the daily overall action of the tape seems completely mechanical and redundant to me. On a typical day, starting from the open the market swings back and forth 50-60 points for the first 60 minutes, and then settles into a directional range. From Noon to about 2PM, it slows down to a crawl with little movement at all, and then at approximately 2:30PM it makes a sudden powerful lurch in the direction it wants to go, which usually establishes the day's outcome. Finally in the last 5 minutes it now often makes a quick 30 point spurt up or dive down. On other days, which you guys call trend days, it opens and quickly establishes a set direction, then goes into painfully exasperating auto pilot mode. Two to three ticks up followed by one to two ticks down, with an occasional 10-20 point move, all in the same direction, all damn day long.
So what's my point? Well, I am now convinced that this market can be, and is controlled by a very few select hands, which know exactly where and when they want to move. How often have we reached important key technical support/resistance levels, which should hold on the first attempt, and yet we cut right through them like butter. Or the inverse happens, as we test support or resistance levels for a 2nd and 3rd time, which should be breached, yet the market seemingly out of the blue, violently reverses and changes course. Also, when an established daily trend seems finally in place, it is suddenly inexplicably quickly snuffed out, and the borgs go on a busting rampage, quickly taking out a gazillion stops in a few minutes, only to return back to that same established trend 30 minutes later.
So where am I going with all this? Well, if the market is indeed getting so thin, that a handful of powerful reprogrammed HFT computers can move the market at will, what will it eventually lead to? My take, is that the borgs actually distort the market to such an extreme, that they move it significantly away from its otherwise normal trend. This then leads to ever increasing insane valuations & volatility, as the market desperately tries to find its proper level, in an attempt to fight off the borg's wicked pre-programed, automated, mechanical opportunistic distortions. I believe the market in some sense is now broken, and the longer the borgs control it, the further it may be getting away from its true value. To me, it feels very much like the day is near, when the market becomes so stretched beyond its proper value, that it will simply implode, violently reaching its true natural level without very much notice at all. That time may have arrived.