"Exploratory
trading is a form of manipulation designed to test the market's reaction to a
trade. Probing for stop orders would be one form of exploratory trading. This
paper specifically investigates exploratory trading that attempts to determine
whether the bid/ask spread is about to shift up or down a level. The impact on
the market would be an increase in intraday volatility. Exploratory trading
distorts the market's view of supply and demand and induces trading activity
from other participants. Furthermore, as participants learn of the strategy,
they will employ counter-measures - which will further muddy an accurate
picture of supply and demand for everyone else. This is why regulations ban
manipulation."
"A lot of media discussion about HFT focuses on 3 benefits: they provide liquidity, narrow spreads and lower trading costs. This Harvard paper exposes some disturbing truths: the top HFT engage in a predatory market manipulation strategy that removes liquidity 59.2% of the time (by volume), causes undue intraday volatility (which amounts to a tax on investors), warps the true picture of supply and demand, and raises trading costs for everyone processing market data."
