February 1, 2016
What controls are in place to prevent HFT damage to the "scarcity" of shares? If price goes down as supply goes up, and trade clearing is T+3. Isn't it true that HFT activity exerts supply-side pressure that necessarily depresses the value of investor holdings? (e.g. if a HFT platform has T+3 days to close a trade, and Lumber Liquidators Inc. (LL) experiences 7M trades in a day (capitalized at say 280M shares). After 3 days of HFT with T+3 to close the trade there are 310M "shares" (7.5% diluted) in the market (280M shares plus 21M warrants)-if price varies inversely with supply, share value goes down when the virtual supply of shares is increased right? So economics and HFT mechanics necessitate that HFT activity depresses shareholder value right? Especially so in small cap securities.
How do we know whether all HFTs are all bona fide investor transactions that constitute true market valuation by independent market actors in an arms-length transaction? What prevents two or more HFTs from passing securities(during the T+3 clearing period) back and forth to each other at incrementally lower prices so that by T+3, the share I bought for $200 on Monday is trading (between two HFTs) at $180, so at T+3 a HFT keeps the $200 I gave them for the share on Monday, they buy a share from someone else on Wednesday, for $180, and give me my share and pocket the change? ($20 per share).
It seems like our HFT market liquidity strategy inflicts a significant dilution tax on investor equity and creates an opaque environment vulnerable to HFT platform self-dealing.
I have no specific information that any of these things are happening or that any entity is violating any laws, but I visualize these vulnerabilities when I start thinking about equity market structure.