I was chatting with a guy on a trading message board about high frequency trading (HFT) explaining that HFT can move the market (e.g. the S&P 500) in an illiquid market, and he says "My point, which still stands, is that HFT has zero impact on moving the S&P 500 index. By definition if HFT was taking positions, it wouldn't be considered HFT. If by HFT you meant automated orders then of course if the algorithms kept hitting stops and continued buying it would impact prices. But algos and automated orders that take on positions have nothing to do with HFT." He seems to think that because HFT only holds trades for milliseconds that it's not considered "taking a position" and thus can't move the S&P 500 (or another large market index). Is he correct or not? If not, why?
automated orders with large volume per trade. Large volume per trade can give the wrong signal on other traders using their ancient techincal indicators to enter the wrong trade.
Could you explain a little more? Are you saying the guy in the OP is correct and HFT can't move the S&P 500?
HFT is a pretty abstract term that can refer to many different styles of trading. If you have an HFT strategy that is a pure market-making/matching strategy, this could be considered in the purest sense for not moving the market. Many HFT strategies are taking directional positions though, if only for a short time they are still trading and taking positions and can affect markets. This could happen either by interacting with discretionary traders, automated traders using non-HFT, as well as other HFT strategies. On other side in a practical sense and as flash crash indicated and many of the HFT firms pulled out of the markets, the liquidity dries up and this also has indirect effect of moving the markets. Again it depends on the specific strategy employed, but in a pure theoretical/ideal sense it may be correct to say HFT doesn't move markets (or shouldn't move markets), but I think practically they do and how much so depends on the specific strategy.
which is why i posted this thread "Trading with stop loss in the futures market is for loser" http://www.elitetrader.com/vb/showthread.php?s=&threadid=222458 Only HFT can trade with stop. They have enough capital to move the market couple cents/ticks.
HFT's dont matter and are good for liquidity. Liquidity can dry up in a NON HFT environment as well. I dont see HFts as a threat, for Day traders they did slow down the reactionary moves to some extent by keeping the spreads tight.
I'm sure some hft's are trading buy/sell programs (index arb) and those orders do move the markets. An article a couple years ago quoted an hft owner saying their average trade was around 10 secs if I remember correctly.
If HFT's are simply trading arb situations, then they are just along for the ride of an inevitable arb convergence that would occur with or without them. In this case, they are not causing the price movement, but may be accelerating the move by virtue of their order flow.