Hello tendim,

Thank you for sharing your views about HFT. I think you conflated two mutually exclusive models here. Namely, the speculator vs. investor model with the HFT vs. LFT model. What may help resolve the mystery is to think of HFT vs. LFT as robotic algorithm vs. human trader. Human traders include both speculators and investors, or if you prefer, short-term vs. long-term investors. Computer algorithms trade so much faster than any human speculator that if you use a time scale to measure the difference in execution the human speculator is now a long-term investor based on magnitude.

The very point you make about long-term investors (time horizons of 3-5 years +) and value investors' margin of safety is the point I routinely make to uber critics of HFT. So please know that I am in alignment with your overall point.

When I was managing money professionally my turnover was 15%. With 40 holdings that is just 6 trades a year in which I am competing with alpha sharks. However, I will point out that if you lose a basis point on every trade and you notice no appreciable difference in liquidity it is still bleeding alpha. There are many sources of alpha not well appreciated by the public, but one that is manageable is trade execution. Bleeding any alpha via trading dilutes the sole advantage of the active human investor: diligent discovery of investment opportunity.

I will also point out that to make your point more contrasting you assumed a low level of alpha loss - a basis point - when, in fact, some of the illegal algorithms can cost human traders up to 5% on trades. Even in your model that is 25% of your margin of safety, and that marginal portion may be the 25% you need to earn your required rate of return.

I am guessing that if this happens to you, even on just six trades a year you would notice and be offended; especially if that 5% loss on 15% of your portfolio is the difference between top decile and second decile performance. And these losses to an algorithm's nefarious effects likely slip below the radar screen of the exchanges and regulators. Currently, you have no recourse available to you other than prosecution, yet the costs of factual discovery are difficult given the massively high volumes traded, and then you still must prove your case (#brutal).

I would characterize the current time in the markets as transitional. That is, it is a permanently changed landscape in trading (HFT is here to stay) and human traders (even at deep value investment houses) and human regulators have yet to adapt to the new reality. That was the point of this piece; now grandfatherly in that it is almost a year old.

With smiles,

Jason