August 25th, 2011
07:01 PM GMT
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Is it easy to understand why investors are getting paranoid. On any given day this summer stock markets seem to rally or plummet hundred of points in the matter of minutes for no apparent reason. Today it was the German DAX. Who is to blame? Market veterans increasingly say high frequency traders. This group use super fast, sophisticated computers that chart stock relationships and look for an opportunity to profit. They trade thousands of stocks each day, holding them for only minutes at a time. Fund managers say this churn and reliance on super-computers is feeding the outsized volatility that is spooking all of us and wrecking havoc on our retirement funds.

Or is it?

I went to New Jersey to speak to one of the few high-frequency traders who will talk to the press, Manoj Narang of Tradeworx. He says the idea that high-frequency firms are behind the huge moves is ludicrous. By definition high-frequency traders buy and sell the same amount of stocks each day. They do not make big bets in one direction. If a stock, like a bank stock for example, does sell off substantially it is very likely their computer programs would most likely guess the stock is statistically more likely to rebound and trigger buying of the stock, thereby providing liquidity.

So if they aren’t to blame who is? Narang does acknowledge technology is playing a bigger role and that the changes are disruptive and at times unnerving. But computer-driven trade should not be confused with high-frequency trading strategies. Everyone, including hedge funds and standard pension funds, relies on computers. It appears regulators are not keeping up with what can happen when sell orders cascade.

Narang has voluntarily sat down with the SEC and other regulators to try and clear the air. He says regulators have been receptive, but he worries the environment of blame is counter-productive. As for the fund managers who are pointing the finger of blame his way? "The oldest trick on Wall Street is to find a scapegoat when you can’t explain your own performance."



soundoff (19 Responses)
  1. Jussi Keinonen

    Why don't people complain about stocks rising up, because it's the same thing obviously?

    August 25, 2011 at 10:38 pm |
  2. Taylor konowe

    @jussi keinonen. Are you crazy? If stocks go up, people make money. Why would they complain?!

    August 25, 2011 at 11:00 pm |
  3. Carl van Zijll de Jong

    Rumours are behind stock market swings. It is time to come to our senses and let real facts determine our state of being. Please, change our monetary order:
    http://theworldmonetaryordertocome.blogspot.com/2010/11/introduction.html

    August 25, 2011 at 11:16 pm |
  4. Rang

    Who, or What ; Bilderberg group.

    August 26, 2011 at 12:08 am |
  5. D. Long

    Wow. Is this an unintended admission of economic ignorance, or what?

    August 26, 2011 at 12:40 am |
  6. Naomi

    Can't mankind cancell each other's debt and start over? No? What do we have to lose except for this dying planet?

    August 26, 2011 at 2:45 am |
  7. Naomi

    Is money issue that much worthy? Why can't we recover a clean green/blue planet in spite of all these intelligent, talented humans living on it? To what are we driven to? We can't reach other planets anytime soon and do we need any more toys sacrificing our only planet?

    August 26, 2011 at 2:49 am |
  8. Darren T.

    HFT plays an irondinately heavy role in this volatility; the quoted trader is just throwing up smoke and mirrors. Broadly speaking, the algorithms on average have similar logic patterns, and so to tend to feed off each other and magnify any given market movement. This will only get worse as HFT becomes the "norm" and even more widespread. The transparent attempt at deflection and obfuscation by the trader is disgusting; the article author's decision to give him a platform to do it is even more so.

    August 26, 2011 at 3:13 am |
  9. skeptic

    Who, or what, is behind wild stock market swings? The short sellers, no doubt.

    Short sellers profit by causing market panic and make a killing doing that. That's why Europe is banning some short selling.

    August 26, 2011 at 3:36 am |
  10. Casper

    What do people expect ? When was a random walk down Wall St a precise science anyway ??

    August 26, 2011 at 7:51 am |
  11. Investors anonymous

    Why not put a 1$ tax for each trade so that traders will have to take a stand and not wiggle so frickin' much back and forth and try to look at the long term market instead of the short term.

    It would make a nice extra income to the government from the richest also! Poor people doesn't trade stocks. Rich traders do!

    August 26, 2011 at 9:44 am |
  12. triffin

    You think a $1 per trade tax would raise money? That's about 500 times the profit margin per trade of HFT. How much gasoline would you buy if there was a $500/gallon tax on gasoline? I don't think the government would raise too much money with such a tax, but they would definitely kill off any productive benefit that gasoline consumption conveys. Same thing with HFT, taxing transactions will kill it. Are you sure there are no benefits to society from HFT? Vanguard (largest mutual fund company) has made statements that the cost reductions due to HFT will save the average 401k about 30% at cash out. That's the true economics of HFT. And all those massive HFT profits that are quoted? A tiny fraction of the money the big investment banks are making in the opaque, off exchange, non-competitive fixed income markets. Competition in the equity space has resulted in a huge savings to the average investor. The focus on HFT is wildly misplaced, but cleverly so, by a combination of those who can't compete with it (so-called "best execution" firms, among others), and those who need attention focused elsewhere while they try to weather the populist uprising against the banking world.

    August 26, 2011 at 2:17 pm |
  13. Chris Robinson

    In days of old, the markets were far more stable, the system was simple you traded and built a position that you could support! There was a time delay, caused by the administration system itself, that meant you couldn't deal again in the same stock until you had the paperwork!
    Then the exchanges computerised, faster and faster microcomputers are available to everybody, they can follow the tiniest trend, thousands of them instantly dealing turning it into a major event and affecting the market, happy to take the smallest profit and getting out to repeat the deal millions of times.
    This system just sucks cash out of the market to no benefit except to the leach that sucks!
    In effect the market has become a computer game played in nanoseconds, it is no more real to these users than a playstation session whilst the bankers and brokers still believe they are in control!

    August 26, 2011 at 11:48 pm |
  14. Sconzy

    I for one don't think IAs are succeeding in their analysis of the market of late. The whole economy is in a mess and they keep tossing with funds as if the economy is a game of logo whereby they can decide solely how to manage funds.

    August 27, 2011 at 6:18 pm |
  15. dmacm

    In answer to the headline question: Too many men/women who have no idea in what they are investing in and buy sell as a pack or on a whim or on a headline or with a 'system' are causing much of the wild market swings. I suggest that any agency that is going to have a good baseline on just how healthy the market fundamentals are needs to give the various indexes' an 'f' factor for all the shares buying crazies out here who are too stupid to put their money in the bank or, most likely it would be better of buried in their backyard.

    August 28, 2011 at 7:40 am |
  16. camonwheels

    These big speculators are going to lose money soon , as more wary equity investors around the world are starting to get smart, put everything on hold – sit down and dont trade.

    August 31, 2011 at 6:39 pm |
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