From the New York Times, a general account of HFT’s impact on retail brokers:
ON the afternoon of May 6, 2010, shortly before 3 o’clock, the stock market plummeted. In just 15 minutes, the Dow tumbled 600 points — bringing its loss for the day to nearly 1,000. Then, just as fast, and just as inexplicably, it sprang back nearly 600 points, like a bungee jumper.
It was one of the most harrowing moments in Wall Street history. And for many people outside financial circles, it was the first clue as to just how much new technology was changing the nation’s financial markets. The flash crash, a federal report later concluded, “portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.” It turned out that a big mutual fund firm had sold an unusually large number of futures contracts, setting off a feedback loop among computers at H.F.T. firms that sent the market into a free fall.
Despite computers’ many benefits — faster, cheaper trades, and mind-boggling analytics — they have been causing problems on Wall Street for years. Technology has fostered so-called hot money — money that quickly shifts from one stock to another, or one market to another, always seeking higher returns. Computer-driven program trading was developed in the 1980s and was a contributing factor in the 1987 market crash, though it wasn’t the main culprit, as many initially thought.
Since the 2010 flash crash, mini flash crashes have occurred with surprising regularity in a wide range of individual stocks. Last spring, a computer glitch scuttled the initial public offering of one of the nation’s largest electronic exchanges, BATS, and computer problems at the Nasdaq stock market dogged the I.P.O. of Facebook.
And last month, Knight Capital, a brokerage firm at the center of the nation’s stock market for almost a decade, nearly collapsed after it ran up more than $400 million of losses in minutes, because of errant technology. It was just the latest high-profile case of Wall Street computers gone wild.
High-frequency traders didn’t cause all of these problems. But these traders and their computers embody the escalating technological arms race raging across financial industry.”