Charlie Munger Rips Into HFT Code Breakers

 Charlie Munger, Vice Chairman of Berkshire Hathaway, just laced into high frequency trading.  In an interview with CNN, Munger blasted away at HFT and questioned if they added any social value. Click here to view the CNN interview

 Here are a few of his quotes:

 “Big time, short term trading is legalized front running.  It’s just done electronically with code breaking skills and I don’t see any social contribution.”

 “Why should we want to encourage our brightest minds to do what amounts to code breaking in electronic trading?”

 “I don’t think the rest of us have anything to gain in having massive trading between computers who try to outwit one another with their algorithms.  To the extent that one succeeds, the rest of us are all paying.”

 “The whole system is stark, raving mad.”

 Legalized front running, code breaking, no social contribution – whatever happened to liquidity providing spread shrinkers?   Finally, big corporate executives are waking up to the fact that our markets have been hijacked by hyper speed, short term traders who could care less about what a company does.  These corporate executives are getting tired of the now daily single stock flash crashes and frequent multi stock flash crashes. They are tired of not understanding how and why their stocks behave the way they do.  They are finally realising that the volume in their stock has mostly been supplied by short term renters who are quick to head for the exit doors.  These corporate executives, many of who have their fortunes tied to their stock price, are now realising that they are held hostage by the price setting ability of HFT and not the price discovery process of long term buyers and sellers.  They realise that what goes up slowly can quickly come crashing down and they are getting nervous.

 Let’s go back to a few words that Mr.Munger used. 

 Code breaking – We don’t think it’s a coincidence that Mr. Munger chose to use this term and the most successful high speed, electronic trading fund, Renaissance Technologies, is run by a former code cracker for the US National Security Agency. 

 Legalized front running – a very careful distinction here that Mr. Munger makes.  There is nothing currently illegal about HFT but techniques like “flash orders” and actionable IOI’s certainly are questionable.

No social contribution – nothing makes an HFT more mad than telling him he adds no social value.  HFT’s pride themselves as being liquidity providers that help shrink spreads.  For some twisted reason, they really do feel like they are helping the retail investor lower their costs.  Tell that to the retail investors who got stopped out on May 6th and lost a fortune.  Tell that to the retail investor who places an order to sell 500 shares only to get constantly sub-pennied by an “internalizer” who is “adding liquidity”.  Tell that to the retail investor who has had his order flashed all over the market.  Tell that to the institutional trader whose every keystroke is being tagged and tracked and packaged into a market data product that is being sold or given away by the exchanges.

 Corporate executives like Charlie Munger are starting to speak out and pressure for real market structure reform is mounting.   Tick, tock, HFT…tick, tock.