There are two competing forces:
- High-frequency trading quickly propagates information across markets, reducing the need for fundamental investors to do research and make capital allocation decisions.
- High-frequency trading drives down the rewards to
fundamental investors, by making prices react instantly to their
activity so that they can never make a profit by buying (selling)
undervalued (overvalued) stocks.
efficient: The David Einhorns of the world will make less money finding
undervalued companies, but their work will have more effect on market
prices and capital allocation. If force 2 outweighs force 1, then ...
well, you could imagine a world where high-frequency trading is so
speedy and efficient that there's no way for fundamental investors to
make any money: As soon as David Einhorn even thinks about buying a
stock, its price snaps up to what he'd consider a fair price, so he
can't profit from buying it.