A high frequency trader wants to jump in front of your trade and then sell that stock to you.
Can he explain exactly how this is supposed to happen? Let's think it through. You see a stock priced at B, and you decide you want to buy it. Cuban is saying that a high frequency trader will see that you want to buy the stock, and he'll buy it for B and then sell it back to you at B+X, making X in the process (any you pay more for the stock). To do that, he'd have to know that you were about to submit an order. But he only finds out about your order after you've submitted the order to the exchange, and the exchange has relayed it to him. He doesn't get the opportunity to "jump in front of you", and I have no idea why Cuban thinks he does.
In actuality, what happens is this. The high frequency trader sees that the stock is priced at B if you want to buy it, and S if you want to tell it (with B > S). He then expresses his willingness to sell you the stock at B-X (by sending a limit order to the exchange). When you come along to buy it, you get it at B-X instead of B, which saves you money. The trader gets a rebate from the exchange for supplying liqudity (which he did, since you got the stock for less than you would have otherwise) and hopefully he is able to buy it back for some price around S (with another limit order), thereby making the difference between B-X and S.
There are dangers with high frequency trading [1] but they are not of the kind that Cuban is describing.
They send in tens of thousands of requests a second, many of which they have no interest in ever being forfilled, in the hope of partly fooling other people, who are sending around similar numbers of requests.
Stock exchanges have turned into a high-frequency war-ground, which fortunately doesn't appear to spill out and effect the rest of us too often, at least as far as I understand.
Most exchanges that I have experience of have a minimum trade-to-quote ratio, i.e. at least a certain proportion of your quotes have to turn into trades, or you'll be warned and eventually kicked off the exchange.
In any case, to the 'end user' (a regular stock investor like you or me) the continual jockeying for position among HFTs doesn't matter - all we notice is that we pay smaller spreads and get our orders filled more quickly.
Sometimes the trading games spill out into the 'real world' with unpleasant consequences, but those instances appear (so far) to be rare. I think there needs to be tight regulation on HFTs to limit behaviour like quote stuffing, spoofing and other forms of gaming, but I don't agree with the argument that they are a net bad thing.
Many exchanges have limits on the number of order cancellations you can make. You get penalized if you send too many cancels compared to the number of trades you get.
Besides, most retail orders go through brokers, not directly to the exchange, and the brokers can provide their own layer of algorithmic sophistication to help the clients get a better price than if they were to place the orders on the exchange on their own directly. This can be done by internally matching orders on both sides, as well as placing orders at strategic times and prices, also using algorithms.
So, this isn't really about "poor retail investor" against "evil predatory high-frequency trader".
>They send in tens of thousands of requests a second, many of which they have no interest in ever being forfilled, in the hope of partly fooling other people, who are sending around similar numbers of requests.
This can actually happen with things like "breaking the iceberg"--playing tricks with the order book, but like you said, there clearly exist dangers with HFT, to claim that all HFT is evil is just flat out wrong.
Can he explain exactly how this is supposed to happen? Let's think it through. You see a stock priced at B, and you decide you want to buy it. Cuban is saying that a high frequency trader will see that you want to buy the stock, and he'll buy it for B and then sell it back to you at B+X, making X in the process (any you pay more for the stock). To do that, he'd have to know that you were about to submit an order. But he only finds out about your order after you've submitted the order to the exchange, and the exchange has relayed it to him. He doesn't get the opportunity to "jump in front of you", and I have no idea why Cuban thinks he does.
In actuality, what happens is this. The high frequency trader sees that the stock is priced at B if you want to buy it, and S if you want to tell it (with B > S). He then expresses his willingness to sell you the stock at B-X (by sending a limit order to the exchange). When you come along to buy it, you get it at B-X instead of B, which saves you money. The trader gets a rebate from the exchange for supplying liqudity (which he did, since you got the stock for less than you would have otherwise) and hopefully he is able to buy it back for some price around S (with another limit order), thereby making the difference between B-X and S.
There are dangers with high frequency trading [1] but they are not of the kind that Cuban is describing.
[1] http://en.wikipedia.org/wiki/Knight_capital#2012_stock_tradi...