Over the last few weeks there were a lot of people talking about flash-trading and the impact on market?s liquidity. I?ve heard people saying that 70% of market volume could be attributed to HFT. There was an article in the NYT saying that the market disruption on May 6th was because a HFT fund suddenly stopped trading when market began to plunge. In that article, they say that some of these funds haven?t had a daily loss over the last 4 years (holy shit!). I was surprised not to see any comment on this issue here. Isn?t it where quantitative finance has evolved the most over the last few years?I would appreciate some thoughts.

It wasn't just changes in HFT participation but also: 1) changes in NYSE execution (NYSE slowed execution which caused orders to reroute to less-liquid exchanges) and 2) the presence of stop-loss orders which triggered during the drop to create an imbalance of market sell orders.The HFT liquidity issue should make people realize that liquidity can't be trusted and people who think they can dump their position on to the greater fool are the fool themselves.The NYSE slowing issue is going to be addressed by better coordination so that all exchanges behave similarly.The stop-loss issue will remain a systemic risk in the markets unless that order type is outlawed (extremely unlikely).

I think this is a good point about the whole HFT / Liquidity issue: http://www.thereformedbroker.com/2010/0 ... dity/Can't say I completely agree but I'm a bit torn.

Interesting article, Hansi. It may not be fair to say that HFT caused the decline so much as to say that HFT didn't halt the decline. HFT are NOT market makers in the usual sense because they are under no obligation to provide an orderly market.It seems extremely dangerous for people to assume that they can buy or sell equities at any time they please. In many ways, what happened on May 6th in equities was somewhat similar to what happened to ARS (Auction Rate Securities) in Feb 2008 -- liquidity on a long-term asset disappeared and those that treated the long-term asset like a short-term asset got screwed.The SEC is now proposing stock-by-stock circuit breakers to put a 5-minute pause in trading if a stock drops 10% in 5 minutes. This seems like an excellent solution for a world in which price information moves faster than fundamental information.

HFT is about making a profit from temporary imbalances in supply and demand on a given stock, right?.....and a very small number of HFT players are responsible for most of the market volume, right?......is this not an imbalance per se?...... I heard that some authorities are considering testing complex systems to detect potential HFT traps. I am wondering if all this will not create new market imbalances.