Exactly how did we get into this mess with the capital markets? A situation where the
global stock of derivatives is over $US600 trillion, which is about twice the capital stock of the world. A situation where
high frequency trading is over two thirds of the transactions on the NYSE and about the same in the stock markets of the UK and Europe. Likewise they are over half the action in foreign exchange markets and they are rapidly becoming dominant in the futures market.
...
Why do we think liquidity is a good thing? Answer, because it facilitates trade around the exchange of information. Information about what? one might then ask. The company in which the investment is being made, is the answer.
Does algorithmic trading exchange information about the performance of the company? No, it is only working off information about trading behaviour. Ergo, it may increase liquidity but it is not fulfilling the purpose of liquidity.
That kind of shift to traders working mostly off what traders do, rather than assessing the value of what is being traded, has become an absolute plague. It has taken over most Western financial markets. Hedging, for example, used to be all about hedging bets to protect the underling exchanges (usually wheat, or pork bellies or physical things).
Now, hedging is all about reading behaviour, which then leads to other hedging strategies that are based on reading the hedging behaviour, and so on.
http://www.nakedcapitalism.com/2011/07/time-to-take-stock.html