This is a very important question and you will find arguments from both sides, in part because it is still understudied.
Ben Golub, Economics Ph.D., from Stanford answers "Is high-frequency trading good for the economy?" on Quoram quite well.
This is an important but understudied question. There are few
published academic studies on it, though several groups are working on
the subject. You may be interested in the following papers:
These document some of the phenomena that arise in high frequency
trading, from a theoretical and an empirical perspective. However, a
full equilibrium analysis of the unique features of high frequency
trading is still missing, and until it is done, all our answers will
be kind of tentative.
Nevertheless, there are some obvious things one can say. Currently,
high frequency traders are competing to locate physically closer and
closer to exchanges, because milliseconds matter. Thus, large amounts
of money are being spent to beat other market makers by tiny fractions
of a second. Once many firms make these investments, the market looks
like it did before in terms of competition and prices, but is a tiny
bit faster. This investment is unlikely to be socially efficient: that
is, the users of the market don't actually benefit from the fact that
their trades are executed half a millisecond faster -- certainly not
enough to cover all the investment that went into making that happen.
Some people who study the issue believe that high frequency trading
(HFT) actually exacerbates market volatility; some plots to this
effect are found in the second paper linked above. There is certainly
no widely accepted theory that says faster trading technology
necessarily increases efficiency, and it is easy to think of
algorithms that can make money (at least in the short run) but hurt
most other investors, as well as the informational value of the
One caution is that some of the complaining about HFT comes from those
who lose when HFT gets better -- old-style market makers. They
certainly have an incentive to make HFT out to be very bad. So some
complaints about the predatory nature of HFT should be taken with a
grain of salt. There is no strong economic consensus about the value
of this activity. For what it's worth, my personal impression is that
this is more bad than good. I'll post an update here as more
definitive research comes out.
You can also find a debate on High-frequency trading from the Economist which gives both sides of the argument.
Regardless of how you feel about HFT it seems like it's here to stay and won't be leaving in the foreseeable future. So the debate will rage on...
Additional resource you may finding interesting:
Europe Begins Push To Ban HFT
High Frequency Trading Discussion On CNBC
Should High Frequency Trading (HFT) be banned ?