Sometimes when you are too close to a subject and when the only people that you talk to are all in agreement, then a knowledge bubble is formed.  You can’t see how you could be wrong and anybody who questions you must not be well informed.

The HFT community believes that they add liquidity and create efficient prices.  They seem to think that the efficient market hypothesis still holds true.  Take a look at this quote from a Reuters article titled, “Some wary of SEC’s high-frequency presumptions” : 

Michael Mendelson, director of global trading strategies at hedge fund AQR Capital Management in Greenwich, Connecticut, told the conference there is a presumption that so-called order anticipation strategies used to anticipate the direction of trading is not good for markets.

The SEC study “cites a paper that calls them ‘parasitic’ and says that they do not make prices more informative. I think that’s actually incorrect,” Mendelson said.

Order anticipation makes prices more informative because it quickly pushes prices in the appropriate direction, he said. “The market is more efficient when the market moves to the right price right away.”

http://www.reuters.com/article/idUSN0713315320100208

So, stepping ahead of institutional orders for a chance to scalp a quick profit at the expense of 401k investors is a good thing for the market?  Does this activity help or hurt the price discovery process?  We would argue that in the long run the market will set the correct price for a security.  But short-term, this trading noise takes away from the price discovery process and actually hurts long term investors.