The hedge fund de-risking and mutual fund redemptions will probably slow the growing ambiguity of worldwide economic growth, a negative feedback loop engendered by the political circus in Washington, D.C., and signs of an increasingly fragile European banking industry have (in large part) contributed to the recent selloff in the world's markets. I am convinced, however, that several noneconomic, temporary and artificial influences have conspired to accelerate the recent drop of stock prices.
A General De-risking by Hedge Funds
Recent Hedge Fund Redemptions
A Nearly Unprecedented Liquidation of Domestic Equity Funds
I think the high-frequency trading is a major negative for the stock market. It is a major negative for the economy, and it does not do anything for the economy. It does not add any value to the economy. It doesn't add any social value. Charles Munger, Warren Buffett's partner, in an interview on CNN in May, essentially said the same thing.These high-frequency traders begin the day owning nothing and end the day owning nothing in terms of common stocks. During the day, they are accounting between 50% and 60% of the volume.
There was a terrific article in The Wall Street Journal on Tuesday. The headline was "A Wild Ride to Profits." The article talked about what happened on Aug. 8, when the S&P 500 index was down 6.8%. That day happened to be the single most profitable day in the history of high-frequency trading. These high frequency traders made an estimated $65 million. While on that day, the stock market lost $850 billion of value....
The liquidity that they add to is useless liquidity. It has no lasting value. It consists of orders that are placed and that are quickly retracted. It heavily, heavily consists of front-running.
It is amazing to me the New York Stock Exchange puts up a facility right next door to their computers in New Jersey and then they lease out space to 10 or 15 or 20 of the highest so-called co-locations so that those individuals putting their computers there can get a microsecond of an advantage over their competition. If the New York Stock Exchange thinks this is a smart idea, in order to generate volume, I don't think so.
But can I go back to something else? There was no high-frequency trading four years ago. What permitted high-frequency trading, in my opinion, to occur was when the SEC removed the uptick rule -- on July 7, I think, 2007.Right now, I ask a question, where are the regulatory bodies? We have had a major destruction in confidence. You can help restore confidence to the markets tremendously, in my opinion. If the SEC would consider reinstating the uptick rule, reinstating the uptick rule -- if you reinstate the uptick rule, you don't have to do anything else. That will bring high-frequency trading to a screeching halt, but understand that the New York Stock Exchange may not be in favor of it. The major investment banking firms won't be in favor of it. The hedge funds, most of them, won't be in favor of it.
-- Marvin Schwartz (Neuberger Berman) on CNBC's "Strategy Session" (Aug. 18, 2011)