SEC Chairman Mary Schapiro is now saying that there may be some real problems with high frequency trading:

Chairman Mary Schapiro of the Securities and Exchange Commission (SEC) is worried about the rise of high-frequency trading, but two years after the agency flagged the phenomenon as a potential problem, she says regulators still don’t know enough to do much more about it.

High-frequency trading, which is practiced by hedge funds and other technologically turbocharged investors, involves the purchase and sale of large volumes of shares in tiny fractions of a second, often to exploit fleeting inconsistencies in the markets.

At a wide-ranging question-and-answer session with reporters Wednesday, Schapiro said that major regulators from various countries gathered in the fall to confidentially compare notes about high-frequency trading.

“And we all concluded that we have concerns but we don’t have enough data yet to really be able to justify significant additional steps at this point,” Schapiro said. “We need to have a much deeper understanding of the impact of high-frequency trading on our markets.”

This is why financial “innovations” should be treated the same way that the FDA treats drugs: You don’t get to use them until they are proven safe and effective.

But beyond this, it’s clear that HFT is a form of front-running, where computers see incoming orders, and get to the queue ahead of those orders in order to profit from the market move.

A financial transaction tax of 10 (I’d actually favor 50) basis points would solve this, and a lot of the other problems of our financial system.