The Economist sides with the high frequency trading ("HFT") practitioners who are "frustrated by what they perceive as an unfair onslaught". The Report resorts to tried and tested rhetoric - HFT is difficult to define; there is not enough data. But these factors present no barrier to the conclusion reached that "high-frequency traders provide liquidity and 'knit' together our increasingly fragmented marketplace, resulting in tighter spreads that benefit all investors" (citing testimony delivered to the Securities and Exchange Commission in 2010 by George Sauter of Vanguard, a big fund manager).

Liquidity and lower transaction costs only benefits an investor when they trade. High liquidity and tight bid-offer spreads are only available, as all practitioners know, when it is not needed, becoming the first casualties of market downturns and volatility. Market-making needs adequate compensation for the risk assumed. Forcing return below sustainable levels encourages dealers to boost revenue from proprietary trading (often using the information gained from client activity) and trading structured products, creating different risks.

The Report ignores the real problems of HFT - the problems of potential market manipulation, insider trading, front running client flows and increased market volatility often at critical times. The Economist cannot imagine a world without HFT which is "an "outcrop" of the market structure".

High trading volumes are regarded as normal and desirable. In the zero sum game of trading, the presence of super fast computers copulating with other super fast machines provides uncertain benefits in financial intermediation.
Average investment periods for shares have shortened from around 7 years to 7 months since 1940. HFT now accounts for over 60% of equity trading, with an average holding period of around 11 seconds. High levels of trading may create excessive "noise" preventing prices from reflecting true value, ultimately leading to a loss of confidence in certain markets discouraging investment. HFT may damage the process of long term capital accumulation and allocation.

David Fuller's view Fullermoney is firmly in agreement with Satyajit Das on this subject. For more on HFT, click on the 'Search' link in the menu shown upper-left, fourth item down and type high frequency in the window provided, and then click on the blue link shown to the right.

I strongly recommend the rest of Satyajit Das' common sense article which also contains some terrific quotes.