HFT is a direct result of the decimalization that took place around April 2000, as mandated by the SEC. Up until that point, the market maker was the one who was screwing the individual investor because of the wide fractional bid/ask spreads that were being kept. When decimalization took place, price discovery went from being at a few predetermined fractions of a dollar to what we have today. With the resulting spreads being smaller, the incentive for a market maker to provide liquidity went away, as there just wasn't any incentive to do so. Many market makers today are now nothing more than glorified HFT themselves, and pass the resulting executions print for print onto the client. When the price finally reaches a level that the market maker may believe is over extended, he'll come in and take a long or short position. The whole purpose of decimalization was to reduce the costs the investor was paying for his trades in the market. The unwanted side-effect is an explosion of HFT and trade volumes at various price points in the sub-penny range in order to milk out inefficencies of price discovery that was introduced by the SEC.
Yes the HFT are making huge profits, but if an investor is in it for the long-term, most days the resulting price difference of a few pennies isnt going to matter much. Which is the lesser of 2 evils, the market maker prior to April of 2000, or the HFT of today?
Take your pick, the investor was always being raped in some form or other. None of this is anything new. I'd argue that the average investor is getting hurt less by HFT than he was by the market maker of a decade ago.
