According to some investors on Wall Street, the reason for the market’s recent instability is not due to problems in Washington or Europe, but rather high-frequency trading. As reported by Kenneth Rapoza of Forbes.com, two legendary fund managers, Marvin Schwartz of Neuberger Berman and Leon Cooperman of Omega Advisors both told CNBC on Thursday that the high frequency trading programs are the cause of the crazy volatility.
“High frequency tradingis the biggest drag on the market. They add nothing to the market and do nothing for the economy,” Schwartz said on CNBC.
High frequency trading (HFT) is based on proprietary computer models that buy and sell securities without human intervention. HFT is a popular among quant funds, which often use computer models to pick stocks based on input criteria such as, in simple terms, if SPY is up 0.5%, sell VXX.
Schwartz said that high frequency funds account for around 60% of the trading volume on Wall Street. Moreover, the computer systems are often a milisecond ahead of the trading floor and able to profit on half cent price differences.
“These traders start the day with nothing and end the day holding nothing and are making record breaking profits no matter which way the market goes,” Schwartz says. “The liquidity they add is useless. They add no value.”
Leon Cooperman, chairman and CEO of Omega Advisors, says he would like to see HFTs and credit default swaps outlawed. “There is no economic reason for a stock market to go up and down 5% in a day. That’s all because of high frequency trading.”