This paper studies the effect of a high-frequency market maker entering the Dutch stock market: <a href="http:&#x2F;&#x2F;www.amf-france.org&#x2F;technique&#x2F;multimedia?docId=workspace:&#x2F;&#x2F;SpacesStore&#x2F;da3b39f7-aff7-4413-ac2b-9f9a3ddbbac2_fr_1.0_rendition" rel="nofollow">http:&#x2F;&#x2F;www.amf-france.org&#x2F;technique&#x2F;multimedia?docId=workspa...</a><p>The trader they study reduced the bid&#x2F;offer spread and trades 80% passively (he is primarily providing liquidity in the order book for others to trade with). His limit orders are more informative about &quot;hard&quot; news such as changes in the index future price than other traders, meaning he tries to buy stocks that are cheap and sell those that are expensive relative to the overall market, steering them toward their correct prices. This is just a simplistic HFT from almost a decade ago, modern prop traders have teams of researchers building prediction models with many more inputs.<p>And for all that, he earns a realized spread of 0.72 basis points, before paying for computers and employees. 1 basis point is 1&#x2F;100 of 1%. That&#x27;s in 2008, a time when HFT was relatively new and competition was less fierce, margins are considerably lower these days, not like making 0.72 basis points is exactly robbing widows and orphans to begin with. No human would make a market for such low margins, no human could react nearly instantaneously to changes in the index&#x2F;stock prices to set his quotes, and no human could trade hundreds of stocks at once.<p>How do you think HFTs cause flash crashes? If you look at the middleman&#x27;s net position on page 3, he never accumulates more than 10000 shares in one direction, and his position mean reverts every few minutes. How could a trader who primarily trades passively (others choose whether to elect his orders sitting on the book), never accumulates a significant directional position, quotes both buy and sell prices on the order book, and who aims to flatten his trades relatively quickly (whatever selling pressure he could create is quickly turned into buying pressure after he&#x27;s given a short position) have such a large impact on prices?<p>I don&#x27;t think trading off news feeds is a typical HFT trade. Some market makers may use these feeds to get out of the way during announcements. Maybe it&#x27;s an automated trade for hedge fund types, but it&#x27;s a high-risk, high-reward infrequent type thing. If a trader is incorrectly predicting prices long enough, they&#x27;ll lose money and go out of business.