"Today, the unintended consequences could be at least as severe, in the opposite direction. The typical high-frequency firm earns a profit of well under one-hundredth of 1% per transaction, say traders and analysts. A tax rate of just 0.01% “would instantly wipe out HFT,” says Manoj Narang, chief executive of Tradeworx, a high-frequency firm in Red Bank, N.J. With high-speed traders accounting for roughly two-thirds of all volume, such a result would likely be highly disruptive to the market."

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Why Levies on High-Speed Trading Won’t Work - WSJ.com

One of the joys of participating in a market dominated by high frequency traders and having a long-term view is that you can almost always be sure that the person on the other side of the trade is not trading on information about the fundamentals of the company. Of course, to act on this you’ve got to be willing to stomach the volatility. This is known as looking stupid in the short-term.

The trouble is the momentum becomes a self-fulfilling prophecy. As the volatility increases, the opportunity cost of holding an investment increases, and investors get skittish and start selling, driving the price down further. As the stock price falls, it has all sorts of real and imagined effects. Companies start curtailing activity and investment, fearing a slowdown. Management starts getting concerned and tries different strategies to unlock shareholder value (i.e. hold on to their jobs). The accountants start pressing to do goodwill impairment tests. The impairments lead to net losses, the net losses lead to layoffs, and the layoffs lead to reduced demand.

So, even if you can stomach the volatility psychologically, the real world may intrude on your ability to just ride it out.

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