Why have mainstream news outlets suddenly gotten excited about the "high frequency" or algorithmic trading that's taken place on Wall Street for years? According to Time magazine, a short white paper written by Joseph Saluzzi and Sal L. Arnuk, co-heads of the equity trading desk at agency brokerage Themis Trading, is behind most of the uproar.In the paper, "Why Institutional Investors Should Be Concerned About High Frequency Traders," Saluzzi and Arnuk say that high frequency traders (HFTs) provide low quality liquidity, can generate false trading signals and have faster servers than other traders.

On the liquidity quality issue, the two authors say, "In the old days, when NYSE specialists or NASDAQ market makers added liquidity, they were required to maintain a fair and orderly market, and to post a quote that was part of the National Best Bid and Offer a minimum percentage of time. HFTs have no such requirements. They have no minimum shares to provide nor do they have a minimum quote time. And they could turn off their liquidity at any time. When an HFT computer spots a real order, the HFT is not likely to go against it and take the other side. The institution is then faced with a very tough stock to trade."

The high-frequency traders generate false signals, they say, because "a spike in HFT volume can cause an institutional algorithm order based on a percentage of volume to be too aggressive. A spike can attract momentum investors, further exaggerating price moves. Seeing such a spike, options traders can start to build positions, which, in turn, can attract risk arbitrage traders who believe there's potential news that could affect the stock."

The fast servers co-located at exchanges that high-frequency traders use are a problem, Saluzzi and Arnuk say, because "they can beat out institutional or retail orders, causing them to pay more or sell for less than they should have for a stock."

In a recent Aite Group paper, managing partner Sang Lee defended high-frequency traders. "The high frequency trading community...has also taken part in improving market quality, as defined by increased liquidity and tighter spreads," he said.

"In today's highly electronic trading environment, high frequency trading firms play the role of liquidity providers, very much like the traditional market makers and specialists of the past, just without the perception of conflict of interest and information advantage. In other words, someone has to be paid to provide liquidity into the market, and the high frequency trading community represents the next evolutionary group to do so."

While certain practices, such as flash orders and front running, deserve regulatory scrutiny, it's hard to fault firms for having fast computers or taking advantage of the co-location services exchanges provide. As Lee points out, the trading community has undergone a technological evolution. How do you turn back that clock?