hft day trade zero positions at two ends of the day

High-Frequency Trading 'Negative' for Stocks: Marvin Schwartz

Published: Thursday, 18 Aug 2011 | 1:23 PM ET

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By: Gennine Kelly
Web Producer, CNBC

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 High frequency trading is a "major, major negative for the stock market" and the overall economy, legendary value investor Marvin Schwartz, managing director and senior portfolio manager at Neuberger Berman, told CNBC Thursday.

 

 

 "These high frequency traders begin the day owning nothing and they end the day owning nothing in terms of common stocks. But during the day they're accounting for between 50 percent and 65 percent of the volume," said Schwartz.

 The liquidity that is added to the market is "useless," with "no lasting value," he added. "It consists of orders that are placed and that are quickly retracted. It heavily, heavily consists of front-running."

 "There was no high-frequency trading four years ago. What permitted high-frequency trading, in my opinion, to occur was when the SEC [Securities and Exchange Commission] removed the uptick rule," explained Schwartz.

 

 

 The uptick rule was implemented in 1938 and required that every short sale transaction be entered at a price higher than the price of the previous trade.

 He added that if the SEC brought back the uptick rule the valuation of stocks would dramatically increase on a permanent basis.

 Hedge fund billionaire Leon Cooperman, the chairman of Omega Advisors, also agreed that regulators need to go after high-frequency traders.

 "There is no economic reason for markets to go up 5 percent a day and down 5 percent a day. There's definitely things going on," he added.

"Credit default swaps are also adding instability to the marketplace, and they should only be permitted to be traded in by those institutions and individuals that own the underlying bonds," Cooperman explained.

 

Schwartz also acknowledged that in this type of climate "it's very frustrating trying to pick stocks and invest because everything is going down with differing degrees."

However, Cooperman pointed out that "the environment today is dramatically different than in 2008, maybe not in Europe where their banking system is going through some of the issues that we went through."