Stocks sold off sharply in March, and as they always do, people are looking for a boogeyman. Insert algorithmic trading.

Over the past month, an increasing number of market participants and observers have partially blamed the sharp and sudden decline in stocks on algorithmic trading.

Ostensibly, this makes sense. After all, the March selloff was the fastest stocks have ever dropped 20% from all-time highs. That sounds like the doings of high-frequency trading (HFT) firms, right?

According to one expert, wrong.

“The Covid-19 virus has led to an incredibly negative shock to financial markets, brought upon mostly by the macro disruptions and changing firm fundamentals, and therefore it is unfair to lay this crisis at the feet of HFTs,” Joshua Della Vedova, an assistant professor of finance at the University of San Diego School of Business, told InvestorPlace in an email.

In other words, bad news — not algorithmic trading — killed the stock market.

Indeed, Della Vedova argues that algorithmic trading may have actually helped stabilize financial markets during the coronavirus pandemic — not exacerbated the sell-off.

How? Two words: market making.

Not the Boogeyman

It appears that algorithmic trading may not be the boogeyman that many make it out to be.

According to Della Vedova, HFTs have two main functions in financial markets: price discovery/information integration, and market making.

On the price discovery/information integration side, HFTs simply do what every other investor in the world does. They receive new information, process it, and price it into the markets. HFTs just do it much, much faster than everyone else.

“They have been shown to use algorithms to receive, interpret, and trade on information to push a stock to its new fair value in as quickly as two seconds total,” says Della Vedova.

In it of itself, this price discovery/information integration does not inject volatility into markets. But it does mean that when markets are hit with a flurry of bad news — like they were during the coronavirus pandemic — stocks will sell off quickly. The swiftness of the selloff might spook investors, which could lead to panic selling.

But, that’s not the fault of algorithmic trading. It’s the fault of an irrational human reaction to algorithmic trading.

And such irrational reactions are too far and few between to meaningfully accelerate market selloffs.

Maybe a Helping Hand

On the market making side, Della Vedova argues that algorithmic trading may actually have had a positive impact on financial markets during the coronavirus selloff.

“HFTs have been shown to be active in providing liquidity (limit order buys in this case) to investors and thus reducing the prevailing bid-ask spread (price distance between buyer and seller),” adds Della Vedova. “As many investors decided to sell down their equity portfolios for non-informational reasons, such as requiring cash due to loss of employment income, this HFT market making could very well have reduced the negative price impact of these trades.”

In other words, HFTs may have actually prevented the coronavirus selloff stocks from being worse, by injecting necessary liquidity into financial markets.

Sure, HFTs profited off of providing this liquidity. But, they also stabilized markets by doing so. From this perspective, algorithmic trading may not be the big, bad boogeyman that everyone wants it to be. Instead, it may be a helping hand during rough times.

What Should Retail Investors Do?

For retail investors, it can be somewhat intimidating knowing that you are investing alongside (and sometimes against) supercomputers executing thousands of trades every minute.

But, according to Della Vedova, retail investors have nothing to fear.

“The retail investor should not fear HFTs as they have been present in the market for at least the last decade,” say Della Vedova. “On the balance of things, HFTs are helping retail investors by shrinking bid-ask spreads and providing liquidity within smaller stocks that are more likely to be favored by retail investors.”

So, if you’re a retail investor, what should you do?

Nothing. Don’t be afraid of algorithmic trading. Don’t try to game algorithmic trading. Just keep investing, as you always have, knowing that HFTs are out there to trade quickly and inject liquidity — two things which don’t adversely impact the retail investor, and latter of which actually helps retail investors.

Bottom Line on Algorithmic Trading

Ever since its inception, many market participants and observers have wanted to make algorithmic trading this big, bad boogeyman that exacerbates selloffs and creates price discrepancies in markets.

But the evidence doesn’t support these claims.

Instead, the evidence largely shows that HFTs are not boogeymen — just quick traders and market makers. As quick traders, they do very little direct damage to retail investors. As market makers, they actually provide necessary liquidity, especially during panics and in small-cap stocks, and help retail investors.

Net net, stop blaming algorithmic trading for exacerbating selloffs. HFTs aren’t actually as bad as they seem.