High frequency trading and market confidence

I always get puzzled at articles that claim that retail investors are getting turned off the market because of high frequency trading.

If you are an active trader in the market (i.e. your sole method of generating returns is through the relatively frequent buying and selling of stocks) then I can see how that is the case. You are perpetually front-runned by computers and it is the financial equivalent of getting bitten by mosquitoes.

For most investors, computer trading doesn’t make a difference at all. The only two impacts are if you are trading on margin and some sort of “flash crash” triggers a margin call on your account, and the second impact is if you are planning on making an entry below a certain price or an exit above a certain price and you get your limit order hit.

When establishing positions in less-than-liquid stocks, however, getting front-runned is a pain in the ass and is an unavoidable cost of trading. My suggestion would be to keep order sizes microscopic to average volume and accumulate when somebody is distributing (or vice versa if your task is to exit). Another method is to wait for the company to have a poor quarterly earnings report (that does not reflect a fundamental change in your perception of the business) and when the stock gets hammered, start accumulating in measured steps. There is no science to this – the shares you want to be accumulating at the bid, somebody wants to be selling to you at the asking price and there are times when you see a ask of a sufficient size that it is just worth putting in the limit buy order at the asking price.

In general, unless if you are employing some sort of mechanical algorithm, people that trade more often than not will have worse performance.