HFT and Liquidity
There is a running discussion on whether or not it matters that 70% of the volume we are seeing every day is from automated, proprietary trading and algo’s. Anecdotally, buyside customers are very quiet. Anecdotally, retail is quiet. The folks I talk to are not at cocktail parties on weekends talking about their latest stock tips.
So this HFT gives the illusion of liquid markets. A buyside trader may want to concluse that if he/she had a million share order, it would get done tight, and with a highly predictable, and perhaps minimal impact, based on the volumepattern they now see. But what if the volume that trader sees currently gets turned off, as simply as a plug being yanked from the wall? I wonder if the trader actually has that million share order, will the high frequency traders automatically detect it and unplug themselves? Scary.
If the plug gets yanked down the road, will we all shout about how we should have known? Will we say that no one warned us? Watch where you step, please! For all of us!