Paul Wilmott has an excellent blog post out on how, among other things,  HFT has distorted the price/value relationship.  Here are some excerpts:

“I am concerned about High-frequency Trading (HFT) for two main reasons: Reduction of the relationship between value and price; Potential for positive feedback….Positive feedback is when an up begets a buy, which causes the stock to rise again, causing another buy, etc. etc. And when a fall begets a sell, causing another fall, and further selling, and…”

“Whenever you have a bandwagon, such as HFT now is, then you have the potential for systemic risk and feedback. Remember the last bandwagon…the credit products. How did that one turn out for the world economy?”

“Yes, we are in that familiar territory of moral hazard…How did we find ourselves in this place? Because the HFT boys cleverly played the “liquidity card” at the right time. The argument goes along these lines: “When Mom and Pop want to sell off some of their portfolio to fund their retirement then they’ll get a better price if there’s more liquidity. So liquidity is good.” True! For the shares they’ve held onto for 20 years they will indeed get an extra cent. Whoohoo! Break out the champagne! So you mustn’t argue with the liquidity card. The more the merrier, right? Well, no. The fact that during those 20 years their shares have lost 50% of their value thanks to the Great HFT Crash doesn’t ever get mentioned. One extra cent versus a 50% fall? Hmmm.”

For the whole blog post , read here: http://www.wilmott.com/blogs/paul/index.cfm/2010/6/28/Highfrequency-Trading-Where-are-we-and-how-did-we-get-here