The high frequency traders of today basically fall into two categories:
- Those running algorithms that make use of various market anomalies to siphon money from the markets.
- Those doing the latter-day equivalent of the role that used to be played by a market maker.
The siphoners add no value to the market, in fact exactly the opposite. They take advantage of market anomalies that can only be detected by ultra-high speed trading to remove money from the system. A simple example of a market anomalies would be taking advantage of the distributed market place whereby you can trade the same stock on many exchanges and none of them perform at the same speed. So you see which way the stock is moving on a fast exchange and then take advantage of that on a slow exchange before it has had the time it needs to react. Just like betting on a horse race after it has finished because you know the result before the bookmaker is aware the race is over.
The other high frequency shops are adding value to the markets in the same way a market maker used to. They serve a function of keeping the market liquid. This means that a buyer can always guarantee to buy a stock or a seller can always guarantee to sell a stock because the market maker keeps some inventory to bridge any transitory lull when there are more buyers than sellers (or vice-versa) and yet the price is deemed to be correct. They are the brokers who reduce fluctuations in the market and offer a valuable service, even to a joe who wants to sell his 50 shares in IBM.
Just like anything, there are good guys and bad guys. The tool is high frequency trading. It can be used for good or bad, depending on who is using it and what they are using it for.
Disclaimer: I don't do any high frequency trading.