Tags: Hunsader | Buffett | HFT | stocks

Nanex’s Hunsader: Buffett's Perspective on High-Frequency Trading Is Wrong

Friday, 08 Mar 2013 10:13 AM

By Michelle Smith

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While Warren Buffett says high-frequency trading (HFT) does not affect long-term investors, Eric Hunsader, founder of Nanex, a firm that specializes is monitoring whole market data, begs to differ.

Buffett told CNBC earlier this week that HFT doesn’t make a difference if you own stocks for a long period of time, adding that real-time quotes are good, but people have made them a bad thing by being swayed by what the market tells them at any moment.

“I don’t think Warren knows the difference between high-frequency trading and low-frequency trading,” Hunsader told Yahoo. “He just thinks real-time quotes are bad.”

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He explained that Buffett is “looking at it from a completely different perspective” than most investors do.

First off, Buffett does not purchase stock in the stock market like the average retail investor. He buys from companies' boards of directors, Hunsader said.

Second, Buffett does not sell stocks. His strategy is to buy and hold, whereas “the rest of us have to” sell some assets at some time.

Hunsader likened HFT to New York pick pockets, a problem that people tend to worry about only once they have a bad experience.

“It doesn't affect you unless you happen to be trading when it does,” he explained.

When investors are in the market while HFT is occurring, they get pick pocketed, he said, insisting that HFT absolutely impacts prices and the orders that people make.

Hunsader said a stock price can change a thousand times in a second. “Why does that still occur?” he asked.

He explained that this type of trading slows down firms' smart order routers and they get behind and get misinformation.

For instance, the day of the Knight Capital meltdown, investors who rushed for the exit had their pockets picked for 10 percent.

When a “sane person” sees the data, they simply cannot believe it, he noted.

Charlie Munger, vice chairman of Buffett's Berkshire Hathaway, does not need convincing. He told CNBC that high frequency traders “have all of the social utility of a bunch of rats admitted to a granary.”

Even so, Buffett is not alone in dismissing the impact of high frequency trading.

“At their worst, all HFTs do is hurt other HFTs, or people who want to hurt HFTs by beating the market,” Clem Chambers, CEO of ADVFN.com, wrote in a Forbes article.

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