Buffett, Munger, Gates Trash HFT

HFT Munger Charlie MungerCharlie Munger

The plain talking man from the flat lands of Omaha, Nebraska, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s Charlie Munger, has straight talk for the HFT lobby, as does Bill Gates and the oracle himself, Warren Buffett.

HFT does civilization “no good at all”

Saying high frequency trading “does the rest of the civilization no good at all,” Munger let loose farmer’s logic from the heartland. High frequency trading is the “functional equivalent of letting rats run in the grainery.”  Rats skimming off the food supply which was the product of other people’s work might be compared to the generally oligarch exclusive “HFT” game where traders use a technical advantage to receive material market information before investors and then “frontrun” their orders ahead of other investors.

There are rules against frontrunning

Buffett provided a slightly more sophisticated yet equally pointed response.  “To the extent that it is front running, I think society generally has been against front running,” Buffett snarked.  “There are rules against it.”

Buffett also considered the social value of HFT.  “It adds nothing of value to GDP or real output of goods or services.”  Then Warren Buffett hit on a major point seldom addressed in the HFT debate.  Is HFT “good” liquidity or “bad” liquidity.  When “you really need the liquidity, its not guaranteed to be there,” Buffet observed. He also said HFT isn’t costing average investors more than a penny, then pointed to a key area.

Buffett addressed the issue of create “fake volume.”  Taking it a step further that was done in the interview, this fake activity occurs when an HFT firm generates a flood of quotes and orders to essentially trade with itself.  Some say such activity is used to manipulate the market making software in an attempt to push markets higher or lower, a directional HFT strategy. Other fake activity is the posting of conditional orders that advertise one price, but that price is only good if certain conditions are met, such as the HFT firm displaying the price being paid by the exchange to take the order.  A very short time ago, before the HFT cash flooded the exchange environment, there were only a handful of order types allowed.  Now each HFT firm has bent the arms of exchanges and by one count there are 900 different HFT / Exchange “deal types,” all with different order types. This added complexity is exactly what the HFT firms want, yet it is considered a danger to market structure by old school regulatory types.  Today that definition encompasses anyone who places issues of market security above next quarter’s financial results.

“Not HFT experts” excel at touching on right topics

“It doesn’t seem like its much value added,” said Microsoft Corporation (NASDAQ:MSFT) founder Bill Gates.  “I’m not an expert.  But it seems like a strange source of profit.”

Munger, Buffett and Gates might not have been experts, but in the CNBC interview with Becky Quick they touched on the big topics that mattered.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com