Will laws work? I imagine the big investment banks will just set up dark pools in countries with favorable laws and just trade there instead. Added benefit: no more taxes!
The solution is to realize that high-frequency traders are playing a different game than you, even though they're on the same playing field. They do weird things but it's probably not hurting your returns. (It wasn't HFT that imploded the big banks, Enron, and Worldcom, right?)
They do weird things but it's probably not hurting your returns.
I'm not so sure. The financial system is a nonlinear dynamical system. The hallmark of such systems is that small local perturbations can lead to very large changes in system-wide state. High-frequency trading vastly increases the number of small perturbations, and while most remain local, there is a finite probability that some will percolate upward in scale. So micro-scale trading may increase our exposure to catastrophe.
Does money just grow on trees in the magic stock market? The amount of sustained non-bubble growth the stock market can generate is limited, not unbounded. It follows that if the HFT bots steals a slice of it, then the slice the regular gamblers get is smaller than it would otherwise have been.
They're already getting a slice. Look at any stock quote and notice that asks and bids are different amounts. That's where they get their money from: transactions, not growth. (Look up the expression "delta neutral".)
Is there a magic money tree? That involves a lot more economics classes than I took, so I won't even attempt to answer.
The solution is to realize that high-frequency traders are playing a different game than you, even though they're on the same playing field. They do weird things but it's probably not hurting your returns. (It wasn't HFT that imploded the big banks, Enron, and Worldcom, right?)