Strategist Gayed to Moneynews: High-Frequency Trading 'More Dangerous Than People Realize'

Tuesday, 18 Jun 2013 07:39 AM

By Dan Weil and David Nelson

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Last week's news that Reuters sells early access to monthly consumer-confidence data to customers who use the statistics in high-frequency trading points to the danger of that trading, said Michael Gayed, chief investment strategist for Pension Partners.

"For these high-frequency trading firms," the two-second advantage Reuters is giving to its customers is "a very negative thing," he told Newsmax TV in an exclusive interview.

"Speed can be much more dangerous to markets than most people realize," he said. "If you want to get proof of that, take a look at May 6, 2010 — the Flash Crash, when you had, effectively, all of these very high frequency trades bouncing off of each other, ultimately creating a void in liquidity."

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Gayed also cited the brief plunge by stocks April 23, after someone hacked The Associated Press' Twitter account, posting a false report of a White House bombing. "It was a simple tweet, and the market was collapsing in a period of literally 20 seconds," Gayed said.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Reuters' action reaffirms the public's belief that "the game is rigged, that Wall Street tends to favor the big, wealthier firms, that you don’t really get any kind of advantage by trying to trade or invest on your own," Gayed said.

That raises the question: "why even bother being in markets?" he said.

To be sure, the University of Michigan's consumer-confidence data represent a coincident rather than a leading indicator, Gayed says. That means "it doesn't really impact markets from a longer-term perspective, at least that's what history tends to show," he said.

"To me, the issue is this idea that it's machine-readable, meaning that when it's released it can automatically be scanned by these [trading] algorithms."

A sizable portion of the stock market is machines trading with each other, Gayed said. "You have less and less human interpretation and action. It's more about which CPU [central processing unit] is strongest, the fastest?"

While high-frequency traders defend their practice by saying they provide liquidity to the market, "they’re providing liquidity in many ways to each other," Gayed said. There's not much difference between their strategies, he said.

"And if there’s some butterfly effect that causes things to go haywire, then all of the firms suddenly step back. And because we don’t live in a 1990s type environment of traditional market makers that can calm the [market,] . . . you end up having this vacuum suddenly that opens up out of nowhere."

That's scaring retail investors out of the market, Gayed said. "It’s unfortunate because it’s to their detriment." And it makes the Fed's effort to boost the economy through the wealth effect of higher stocks more difficult, he said.

Gayed thinks high frequency trading should be curbed by imposing an "ultra-short term capital tax rate to . . . make these firms think twice about how quickly they’re going in and out of the markets."

Editor’s Note: Put the World’s Top Financial Minds to Work for You


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