What impact is computer-driven, high frequency trading having on the current stock market rally? Yesterday, Rishi Narang, author of "Inside the Black Box," a new book on quantitative trading, told the Wall Street Journal in a video interview “Taking Stock of Quants in Rally” that computer-driven, high frequency traders are providing liquidity in the current rally and they are on the other side of transactions with the pension funds and real money asset managers.

“There’s a huge rally happening on fairly low volume,” said Narang in the video interview with WSJ Reporter David Weidner. “Most of the volume appears to be driven by a few pension funds and real asset managers and the number of names being bought or sold are narrow,” said Narang. As a result, the kinds of people who would normally take the other side of those trades- hedge funds and retail investors are not as active as they once were, and high frequency traders are the ones taking the other side of those trades. They are buying when pension funds are selling and they are selling when pension funds are buying, explained Narang in the video.

Narang, who is founding principal of Telesis Capital, a Southern California-based alternative investment manager, recently defended high frequency trading in Advanced Trading that.

While there are a lot of misconceptions about quants and the high frequency trading players, Narang points out that there is a human element to high frequency trading. “Human judgment plays a role in many levels in the process from creation of strategies all the way through to how the trading is managed day-to day.” There is also an advantage to the discipline of machines. A computer doesn’t get upset or sad and doesn’t complain about the work hours, said Narang. But Narang contends that at times, humans (i.e., a good developer who understands the markets) will intervene and that firms will probably will have a kill switch. If a firm is trading stocks and a merger is announced, it can take out the name from its universe. Or if there’s an announcement of a Federal Resevere rate changes, he may turn his model off going into that, and decide to wait for the market to adjust. In extraordinary events, such as in the wake of 9-11 or the Lehman collapse, humans will step in at those points.

While this sounds benign on the surface, said WSJ Reporter Weidner, is it possible to use HFT for front running? “It’s possible,” answered Narang. “It really comes down to how people are using them. Computers are no different than other types of tools. They can be used for good or bad,” said the expert in quantitative trading.