High frequency trading has progressed a lot in the last decade or so. From being passive algorithmic trades to now active and aggressive computerised trading, the practice has added a lot of benefits and problems to the securities market.
Volatility is generally considered a negative aspect in securities trading as it creates uncertainty and erodes the confidence of market participants. But it is also true that some volatility is necessary as price change is what makes trading survive.
However, in the current environment, high frequency trades which involve working out complex algorithms and execution of orders in milliseconds can create large amount of volatility in the market. Certain events which are factored into the algorithms can trigger mass buying or selling of securities which can cause large changes to security prices.
Not only such trades can hurt other market participants who rely on traditional trading strategies, it can also hurt the market player on whose behalf the trades get executed. There have been several incidents where high frequency trades had been triggered based on certain events which actually resulted in huge losses to the market participant (Baumann, 2013).
Such losses could have been avoided if the trades involved a certain minimal level of human involvement, so as to ascertain whether the trigger of trades is justified based on the event.
I would disagree with the post that high frequency trading does not result in additional volatility and rather benefits the market. Yes, such trades can add the required liquidity and depth to the market, but the downside is that additional liquidity can cause unnecessary volatility. I do not agree with the statement that liquidity and volatility are always inversely related. In fact too less or too much liquidity can result in periods of bubble creation and sudden bust respectively (Bao, Pang, & Wang, 2013)
References
Baumann, N. (2013). Too Fast to Fail: How High-Speed Trading Fuels Wall Street Disasters. Mother Jones. Retrieved from https://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street.
Bao, J., Pang, J., & Wang, J. (2013). Bond Illiquidity and Excess Volatility. Review of Financial Studies, 26(12): 3068-3103.
