Is this liquidity driving, creating bubble bust scenarios too.
High-frequency trading: Rise of the machines | The Economist: “Algorithmic trading causes concern among investors and regulators
THE arrest of a former Goldman Sachs employee in July for allegedly stealing the firm’s proprietary computer codes thrust the arcane world of high-frequency trading (HFT) into the spotlight. The glare of attention is intensifying. High-frequency traders are essential providers of liquidity—accounting for roughly 50% of trading volume on the New York Stock Exchange—and can claim to have squashed bid-ask spreads. But many claim HFT comes at the price of gouging other investors.
The basic idea of HFT is to use clever algorithms and super-fast computers to detect and exploit market movements. To avoid signalling their intentions to the market, institutional investors trade large orders in small blocks—often in lots of 100 to 500 shares—and within specified price ranges. High-frequency traders attempt to uncover how much an investor is willing to pay (or sell for) by sending out a stream of probing quotes that are swiftly cancelled until they elicit a response. The traders then buy or short the targeted stock ahead of the investor, offering it to them a fraction of a second later for a tiny profit.”