Econintersect: A report still in draft form written by two professors and a CFTC (Commodity Futures Trading Commission) economist presents detailed analysis oftrading data by high-frequency trading (HFT) firms. The report details the study of the market by examination of specific trades. One conclusion is that because HFT that reduces market liquidity (classified as "aggressive trading") is more profitable than HFT which increases liquidity (classified as "passive trading"). Econintersect estimates from the data presented in the report that the ratio of profitablity for aggressive trades vs. passive trades may be as high as 4:1.
The following graph from the report indicates that the liquidity withdrawing HFT activity (HFTa) is significantly larger than the activity that increases liquidity (HFTp). From the report:
Aggressive HFTs (if >60% of their trades are liquidity taking), Mixed (if between 20% and 60% of their trades are liquidity taking), and Passive (if <20% of their trades are liquidity taking).
This is a condemnation of the claim that HFT activities provide liquidity to markets and therefore benefit traditional investors who can make trades more easily. The HFT firms are taking money from the market and, on net, decreasing liquidity. This is akin to paying the local mob to protect your store while they are actually doing the shoplifting.