First of all, no HFT is getting secret information. It's all basically the same information posted at the exchanges. Faster computers and setting up your servers right next to the exchanges' servers (called co-location) allows you to retrieve the exchange data faster than others. However, to make it worthwhile, you need to react faster than others. HFT is akin to functioning as a market maker (someone who buys and sells constantly in order to provide liquidity and profit small amounts off large amounts of trades). In theory, HFTs are modern day floor traders. Back when floor trading for equities was big (floor trading still occurs in other markets), individuals made the same complaints (secret information, ability to see the price before others, etc.). Technology evolves over time and HFT is basically the new era floor trading.
As for the May 6th crash, I have attended a seminar by the US Commodity Futures Trading Commission where they presented their analysis, in addition to reading much of the analysis published by the CFTC and the SEC. The Flash Crash BEGAN in the FUTURES MARKET. Now, yes, HFT made the flash crash worse than it should've. But so did all other participants who sold into the crash. The flash crash was caused by a midwestern MUTUAL FUND who SERIOUSLY effed up. They were running a trading algorithm that was suppose to sell 75,000 E-Mini S&P 500 contracts (around $4 billion in value). They had NO parameters on time or price, they simply wanted to maintain selling as long as they accounted for 9% of the total volume of contracts traded. Now in the past, this algorithm allowed them to sell similar amount of contracts in around 5 hours. However as selling picked up, volume skyrocketed as people offloaded contracts. As the volume skyrocketed, the algorithm MAINTAINED 9% of total volume, meaning they FLOODED the market with a constant stream of sell orders. HFTS trading these E-MINI contracts normally buy and sell rapidly throughout the day but maintain no inventory of contracts. As the selling started and the mutual fund began flooding the market with sell orders, HFTs took the other side of the trade. Meaning they were the ones who BOUGHT, YES, BOUGHT the contracts as the mutual funds and others were flooding the market with sell orders. Even normal market makers did not do this because they were unable to keep up with amount of selling. While rapidly buying and selling contracts, the 18 organizations identified by the CFTC as HFTs had a net position of almost 4000 contracts (meaning that although they're only suppose to hold positions for seconds and close the trade, HFTs ended up building up a net long position). In order to balance their books out, they began adding sell orders in with their other trades. What this means is, HFT provided liquidity by absorbing a lot of the sell pressure from the algorithm that the mutual fund was using but ultimately participated in the crash like all other participants. However, since the contracts flowed through HFTs, HFTs essentially SLOWED DOWN THE DESCENT of the E-Mini contract.
Now ultimately, selling 75,000 E-MINI contracts in such a brief period forced the market down and OTHER PARTICIPANTS (most of which WERE NOT HFT) spread the selloff from the futures market into the equity markets through cross-market arbitrage (attempting to profit off discrepancies between the E-MINI S&P 500 Future contracts and other securities such as the SPY S&P 500 Exchange Traded Fund). The cross market arbitrage affected ALL other participants INCLUDING HFT in the equities asset class.
The problem on May 6 wasn't HFT. It was the fact that a mutual fund from Kansas used an algorithm that they did not fully understand to trade. It was technology in the wrong hands. If you DO want to go after those who are abusing the new technological advances on Wall Street, don't stupidly target one group without any understanding of what they do. Go after those who are actually doing something wrong (such as the small subset of HFT who use quote stuffing to increase latency and create lag between their information and the rest of the market) and make sure you're know what you're talking about.
