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High-Frequency Madness: Code Red

Stocks in this article: SCHW KCG

NEW YORK ( TheStreet) -- High-frequency trading has been terrorizing the markets for a while now, and there's no reason to think that's going to change anytime soon.

There has been no tall stand for it to stop and without much outcry, why would it? Supporters of HFT -- as it's commonly called -- claim that it provides liquidity to the markets. That's a bunch of crap and everyone in the business knows it.

Technically, sure, by slamming the bid/ask spreads of stocks down to pennies and jumping ahead of orders, they are providing some sort of liquidity, but not in the sense that actually matters to 95% of all traders and certainly 100% of all investors.

For starters, up to 90% of all of the "liquidity" gets cancelled within milliseconds after the order is placed, making them rather artificial to begin with. And their algorithmic mistakes are bountiful. How about the botched IPO by BATS Global Markets (BATS)? What about the fake tweet regarding an attack on the White House that caused markets to shave off billions in market cap in a matter of seconds?

Oh wait, I've got it: How about when the algo's drove down equities more than 10% in a matter of minutes in May of 2010, with some quality names down 15%, 20% or 25%? Even more telling was the complete snapback minutes later, with the S&P 500 closing in the green for the day.

I'd love to hear the argument that supports the need and necessity of HFT in today's market. Aside from firms like Knight Trading Group (KCG) practically blowing up from their own errors, all it does is feed the exchanges a commission and keeps quant firms in business. Across the big board, meaning the vast majority of market participants, it not only serves no purpose, but rather, a negative one.

But without anyone to speak out against it, why stop? The exchanges sure as hell don't want it gone, because it represents at least 50% of their volume in any given year, depending on the volatility (less volatility equals less volume and less HFT profit, while more volatility equals high volume and more HFT profit).

You know what, the whole thing just seems corrupt to me. Just like how early data releases are somehow "fair" -- which is a whole different story completely.

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