"The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price"
Really? In what way has it changed?
External factors have always had a huge impact on businesses. I'm sure there were lots of super well run businesses that went under durring the Great Depression (which was, you know, the mother of "external factors").
3. Repeal of the Glass–Steagall Act, giving government-protected 'too-big-to-fail' commercial banks the ability to incur risks traditionally reserved for investment banks.
In order to make money on a trade, the share price needs to move. So you've got algorithms whose attributes manage things like how much of an actual order is exposed to the market at one time, or how much they adjust your bid or ask as the order progresses. I've got some algo documentation whose algo "Watch Out For" notes warn "may be too aggressive and cause impact" and "must watch out for order size that adversely impacts market". But maybe you're a trader that decides you want to be "too aggressive" with your trade and now you've moved the market because you've used an algorithm in a way it wasn't intended to be used, and your employer's risk controls didn't care or didn't catch what you were doing until it's too late. Net effect is that your trade may sway the overall market in a way that moved that company, or that company's sector, or maybe the whole market depending on what impact your trade had.
And all of that assumes the algorithms behave in a way that they're expected to. I like this example from Amazon's pricing algorithms: http://www.pcmag.com/article2/0,2817,2384102,00.asp but you could apply the same concerns to pricing matters of the stock market where the unintended consequences of poorly-conceived strategies have a destabilizing effect on pricing.
HFT allows all of this happen so much faster than could have ever been done manually. And when high frequency trading is being done by entities with enormous balance sheets, and an increased tolerance for risk due to assurances by the government that they'll be bailed out should they make a bad bet, it's got the potential to destabilize the entire market.
> it's got the potential to destabilize the entire market.
No, it really doesn't. There's not a boogey man hiding under your bed just waiting to get you.
You know what would happen if a bunch of computer algorithms went crazy and mispriced a bunch of stocks? The guys running that code would get taken for a bath(1). If a bunch of computers went crazy today and started selling shares of GOOG for $20 then the humans would start buying like crazy and the share price would correct.
Well, that or they would go crying to the exchange operators, and if they're influential enough, they'll get their sales of Google at $20/share reversed.
We would see a lot less of these disruptions if exchanges would make everyone live with the stupid exchanges their computers made.
"On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased."
So in the example you linked, a computer algorithms went crazy, and anybody invested in Knight Capital got hosed ... as did anybody elsewhere in the market that reacted to that instability. Not exactly a convincing argument that it can't or won't happen again potentially on a much larger scale. You basically confirmed my point.
"The market has changed in a way that an overwhelming number of external factors can have a negative (or positive) impact on that company's share price"
Knight Capital loosing a ton of money was not due to an external factor. It was due to an internal factor. The fact that they (apparently?) accidentally deployed a bunch of test code to production. Oops!
My point was that external factors can have an impact on the stock price of an company in ways that previously hadn't been possible, and I cited HFT as one of those factors. You cited Knight Capital whose "internal factor [...] (apparently?) accidentally deployed a bunch of test code to production" resulted in "trading activities [that] caused a major disruption in the prices of 148 companies listed".
So yes - in this case, the internal factor of Knight running a flawed algorithm turned into a very real external factor for those 148 companies, as well as anybody else whose trading was impacted along the way.
Yet Knight Capital's share price never recovered. Say instead of KCG it was JPM, operating without the usual risk concerns because they've got assurance from the government of support. Should investors or taxpayers be okay with such an "internal issue" destroying part of their net worth? And wouldn't a too-big-to-fail company have a broader impact on the entire market if such a think were to happen? It's kind of the whole concept behind too-big-to-fail that they would.
In the extreme, repeal of Glass-Steagall and resulting shenanigans put the entire market at risk, which in turn put the macro economy at risk, which in turn changed the long term outlook of stocks.
That said, I do question the overall premise that HFT affects stock values over the long term.
As someone who invests in small caps almost exclusively, I can tell you that 99.99% of the companies in existence today don't suffer from wild stock speculation.
Really? In what way has it changed?
External factors have always had a huge impact on businesses. I'm sure there were lots of super well run businesses that went under durring the Great Depression (which was, you know, the mother of "external factors").