On stocks, and HFT

Since the recent market explosion, a topic well discussed in financial circles has busted into the attention of the popular blogs: The High Frequency Traders. These are people, backed by massive banks of computers..or, rather, computers backed by quants backed by investors with piles of more than at least a hundred million dollars, running trades on tiny changes in the prices of stocks: They notice stocks in a market on the rise, which is to say, a rise in demand for the stocks, at which point they swoop in, buy massive quantities of these stocks, and resell to the slower buyers.

• As an aside, its interesting to note that here is one of the only places where technology is creating middlemen, rather than cutting them out, as, generally, technology and the internet work together to form new markets, places like ebay, amazon, zappos, and innumerable other online trading places which have jumped in between wholesalers and retailers, and by claiming the profits of both groups, while passing savings on to the consumer, captured great shares of the markets.
  

What HFT claim is their redeeming value, is that they add liquidity to the market, which is to say, make it easy for a buyer to buy stocks. They do. If the market were composed only of buy and hold longterm traders* then days, weeks, even months could pass between lodging an order and finding someone willing to sell their shares of the stock. So, conceptually, traders have a place in the market, as in any market, if only to create the fluidity and the jobs.

Where to draw the line? On the moving frontier of our technical capability. Computers, in the grand scheme, are not so expensive as to be prohibitive to the smart trader, nor is the programming excessively difficult to attain. In fact, a large gripe is that the HFT have been seeking the edges of markets: selling at higher and higher prices until buyer's orders dry up, and then dropping down below the edge of what people are willing to pay. People feel cheated, for when they plug in a stop order for CheeseCo at $23.40, and CheeseCo is selling at $23.10, they expect to pay somewhere between, as CheeseCo prices rise...and they often find themselves paying $23.40, or $23.38. Backtrack for a moment. Someone's decided that they're not willing to pay more than $23.40, entered that into a computer, and left it to buy their stocks (or, really, for this to make any sense, a great deal of people have done so) Another computer has discovered the movement to buy CheeseCo, bought a great deal of it, and is now selling small portions of it at rising prices...seeking the highest point where people are willing to buy. Haggling, in other words.

"I'll give it one you for $23.29"
"Deal"
"And I'll give it one you for $23.30"
"Deal"
"And I'll give it one you for $23.33"
"Deal"
"And I'll give one to you for $23.41"
"Screw that"
"Ok, I'll give one to you for $23.39"
"Deal"

People have decided they're not going to pay more than $23.40, and their machines refuse to do so. Other machines find what they are willing to pay, and charge that...and people turn around and feel cheated. Cheated because the price rose, when there was a mass movement to buy Cheeseco. Cheated because they bought at the price, or just under the price, they said they'd buy at, rather than lower.

Why is it that haggling at the grocer is acceptable, but haggling in the market is not? Because its too fast for people? People planned it beforehand, decided on a price, and were not persuaded or manipulated out of it. If I paid more than I wanted to at the market, my mother would encourage me to not make the deal. I'd encourage anyone else to set their stop orders at what they wanted to pay, and be glad that the HFT machines aren't nearly as persuasive, don't even try to be persuasive, as street vendors.

*note that I do not say investors, a title which should be reserved for persons who fund companies: that is to say, the initial buyer of a stock, as any subsequent trade of a stock does not affect the company. If I buy a google stock on the market, I'm betting on google, but not helping google. If I, instead, buy shares from google, I'm investing.