High-Frequency Programmers Revolt Over Pay

If he actually created it (rather than simply implementing it for somebody), he should almost certainly be paid more than that, and would be at many firms.

While I agree with you that HFT is a scam, I disagree with you that it's a ponzi scheme. It's more like ticket-scalping, so the scheme is going to go on forever, as long as SEC allows it (which they will because the sell-side lobby groups will label themselves as liquidity providers that tighten the spread) and normal people are trading.

What amuses me about Main Street's outrage on HFT is that they suddenly take this expose as a new revelation that Wall Street is screwing with retail investors when the big prop shops/broker-dealers have been raping retail investors and pension plans/retirement mutual funds for decades. HFT is just the latest instrument of exploitations.

That will tend to expand the bid-ask spread. That hurts both buyer and seller.

Example, I'm Fidelity Bob Fund Manager; after extensive research, I decide to make a decision to buy 200,000 shares of AAPL. So I enter my buy order into my OMS screen, which slices and dices these 200,000 shares into blocks of 100 shares (as for traders not to front-run me, because a naked buy order of 200,000 shares will drive the price up and I'll overpay long after my transaction is completed).

HFT program meanwhile is actively scanning the quote book on all market centers for patterns of such a huge "whale order". Bob Fund may leave discriminating traces of evidence, such as executing the same blocks of buy order under my unique MPID multiple times. Or the HFT program is hooked up to a dark pool where it's constantly sending out small sell orders for 1 share to try to sniff out and match Bob Fund's huge buy order. Or it just might be that the HFT program has reverse-engineered the Bob Fund's VWAP algorithm for slicing/dicing orders and can detect how the orders are being sliced/diced under any given market conditions.

Once the HFT algorithm is certain of a "whale order." It'll actively go out to every single market center, buy up all of the remaining AAPL liquidity on those markets and then present it to Bob Fund (voila! I'm providing you with liquidity at artificially inflated price!). Mr.Bob has no choice but to buy AAPL at a maybe a penny or two higher than what he could have paid for without HFT.

The flip-side of the argument for HFT traders are that perhaps, they are better dealers than traditional dealers. For all we know, there might not be any interested retail investors who are willing to trade with Bob Fund; so Mr.Bob ends up trading with traditional dealers which have traditionally higher spread on the price of their stock, as they take on more risk as a dealer because they don't have the same execution speed and high-turnover rate as a HFT dealer. Also, HFT increases nominally execution speed and brings all market center's prices in line, as if there is a NBBO on ARCA and Bob Fund's order is on BATS, HFT will essentially act as the middle-man to match the true best bid and offer together, in the quickest time.

However, the other counter argument against HFT is that it actually doesn't really provide liquidity to the market, as evident by the June flash-crash. During a situation such as this, broker-dealers are suppose to step during irrational exuberance and depression and trade with irrational investors and put a stop to the crash/rise. But HFT dealers stopped trading that day, triggering a lot of people's stop-market orders and hence we saw ridiculous sell orders of Accenture at $0.01.

So I'd say, HFT is a mix-bag.