Machines Are Driving Out Small Investors

 | Aug 12, 2011 | 10:54 AM EDT
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We just want nothing. We don't want up. We don't want down. We don't want any more futures pickoffs, like that absurd up-opening tied to Europe being up, which was up because we were up.

We just want calm.

I am a huge believer that these gyrations are real bad for business. They mock price stability in both directions. They show tremendous frailty that is entirely unrelated and divorced from the business world.

They are awful for individual investors, who, I am pretty sure, exited and did not take advantage of the great "buying opportunity" because they see how fast they can lose money.

The velocity of the declines is very daunting.

Which brings me to high-frequency trading. There is a lot of debate about whether high-frequency trading provides liquidity or sucks it out. Empirically, we know it sucks it out, because you can measure depth of market in real time -- how much it takes to move stocks up or down -- and it takes very little money to move, because these high-frequency traders pull their bids on the decline -- the flash crash showed us that -- and pull their offers on the upswing, as we saw with the sea of green yesterday.

The high-frequency traders always, themselves, say they provide liquidity, but I doubt any of them really believe that, given what we have seen. Yet it is important for them to maintain the fiction and back it up with statistics that don't hold water in the heat of stock market battles. Maybe one will break ranks and admit it, one day, but the moment they do, the SEC will stop it. So it is real important to maintain the fiction. And just so you know, I have met with the heads of pretty much every major desk on this -- including Lehman, ha! -- and they think I am an idiot for saying this stuff.

I say save that nonsense for those who have never traded.

But there's something bigger at work here that the SEC ought to take notice of. I think the SEC should make a study about why the individual investor keeps leaving stocks. They will learn that it is, in part, because of these swings, which make it impossible for many people to hang on.

That's the real lack of liquidity these high-frequency traders cause, because it is the mom-and-pop investor, en masse, as represented by mutual fund buying as well as individual orders, that's leaving the building.

Something to think about over the weekend as we finish what may be the most volatile week in history.



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