I have no particular reason to distrust the author or the paper. Only general reasons to distrust the topic.

If you look at economic research in Europe, you'll see many other opinions, like about the importance of the state, or alternative economic models. You'll probably find studies against HFT also.

Another comment that comes to mind is from Warren Buffett, who famously called derivatives "weapons of financial mass destruction" years before the recent blow up.

Buffet never described derivatives as creating a housing bubble. Buffet's problem with derivatives is that they make accounting tricky and fraud easier. But have no fear! Moodys (which Buffet owns about 20% of) will distill the complex accounting down to a simple letter rating. If Moodys calls a derivative "AAA", you know it's safe.

Snark aside, this was not a prediction of a housing bubble. CDO's did exactly what everyone thought they would do. They behaved like AAA securities for as long as the beliefs underlying them held true ("housing never goes down").

So, this isn't just some single paper with an unexpected conclusion. It is important also because it supports an understanding of economics that is under constant political attack in our society.

[Citation needed.]

Or, Ron Paul addressing the House in July 2002: http://www.ronpaul.com/2008-09-26/ron-paul-on-the-housing-bu...

Yet, somehow, the opposite, where everyone is poorer and a lot of preventative maintenance is avoided because it simply can't be afforded, is somehow better?

    HFT traders are essentially just market makers

High frequency trading is a broad term that encompasses anything that involves computerised algorithms interacting with a market, and with short position holding periods.

MM is a set of strategies which generally requires HFT if you're to be competitive with it on electronic markets.

The author utilizes the Market Participant ID (MPID) to try to determine the underlying firm for a trade, but this is not reliable. It is very common for many many firms to share a single MPID for "tier aggregation" since fees are calculated by MPID and the fees exchanges charge improve with higher volume. This means that many firms (HFT and not) can share a single identifier. Also, many large banks have a single MPID for all their flow, which may include HFT proprietary trading as well as non-HFT flow. He notes these flaws, but I am not sure he realizes how pervasive these arrangements are in the marketplace.

Even if he was able to determine the underlying firm for each trade, there is no rolodex of HFT traders. The author makes a valiant attempt using firm websites and such, but this process is somewhat error prone.

  The only function of economic forecasting
  is to make astrology look respectable.

    -- J K Galbraith:

(Note: I haven't read all of the paper, so please correct me if the details involve forecasting.)

This paper is fundamentally talking about "normal" trading conditions, and the continuing danger is that results like this will be used to bolster the contention that HFT is in fact a good thing, whereas when the market crashes it might be an incredibly bad thing.

I'm not saying it is or it isn't, I'm just saying that there seem to be a lot of assumptions that aren't being made explicit, those assumptions might not be valid, and when they're not valid, all predictions go out the window.

Hence the quotation.

I should add that perhaps this is no surprise. A claim I've seen made is that the information economists need to be accurate is fundamentally undiscoverable. Hence the article I lunk to earlier:

http://news.ycombinator.com/item?id=1686077

That the author appears to run a high-freq quant fund hardly helps: http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60

[citation (or even a few google keywords) needed]

I'm not an expert but I do love studying all sorts of systems and this seems like an extremely plausible explanation. Pinning it on the HFT bogeyman, less so.

http://www.theatlantic.com/science/archive/2010/08/nyse-tech...

If detailed, fully sourced graphs, demonstrating deliberate use of quote stuffing to essentially jam markets isn't good enough for you I suggest you consider carefully your own bias.

Rather than repeating myself, I'll link to my own comment on that exact article explaining why I'm almost certain those graphs are not deliberate.

http://news.ycombinator.com/item?id=1564445

Also from your FT article: Regulators such as the SEC are still puzzling over exactly what caused the flash crash.

(Full disclosure: I work in HFT.)

Perhaps you missed it, but most of the graphs in your link are from July. The flash crash was May 6. So unless you want to assert that the flash crash caused the weird graphs, no, I don't see the connection. That's not to say you couldn't find similar graphs on May 6 - I guarantee that you could. In fact, you can find graphs like this almost every day (pre and post crash) if you look hard enough. And yet, we don't have flash crashes every day. We've only had two (the first was in 1962 http://online.wsj.com/article/SB1000142405274870395760457527... ).

So yeah, I do expect you to do more than point out an everyday occurrence and then assert that it (and not thousands of other things, including things which don't happen every day) caused a once-in-a-lifetime event. I expect, I dunno, correlations at the very least. Maybe even a mechanism, rather than just a theory that "I don't understand everyday event A or once in a lifetime event B, they must be related."

Detailed analysis of the precise trading events that led to the crash. With data.

"Quote stuffing is also not a rare occurrence and these sequences are seen frequently on a daily basis; they are easy to find once you know what to look for."

Compare that to what I said: "That's not to say you couldn't find similar graphs on May 6 - I guarantee that you could. In fact, you can find graphs like this almost every day (pre and post crash) if you look hard enough."

I've seen Nanex's graphs. I don't see how they come even remotely close to explaining why crop circles (which occur everyday) caused the flash crash. Again, what is the mechanism? A DOS attack? If so, then how come we don't have a flash crash every day?

HFT has chilling associations with the “flash crash” of May 6, when rapid, computer-driven orders were seen as a main culprit in sending the Dow Jones Industrial Average down by 1,000 points in 20 minutes – a fall unprecedented in its depth and speed.

“We want to be able to look them in the eye and say the market is fair. And unfortunately, at the moment it’s quite difficult to do that.”

Obviously, that isn't the subject matter that this paper is covering, but it definitely seems to be making an attempt to paint HFT as a Force for Good in the marketplace (or at least dispel attempts to paint it as a Bad Thing), and in my mind as a software developer, even more than impacts when things are Working As Intended, the bugs are what scare me.

- HFT activity has no impact on market volatility and may event decrease it.

- The authors find that there is no evidence of abusive front running.

- HFT plays an important role in price efficiency and the price discovery process.

   Trading = Zero sum
   Investing != Zero sum