High-frequency trading has left corporate executives and investors alike struggling to know the true value of stocks.
“We have created a market that best serves those who don’t want to hold anything,” Tim Quast, managing director of ModernIR, warned a gathering of Denver investor-relations professionals Tuesday.
About 70 percent of daily stock- trading volumes now results from high-frequency trading, where mostly automated, mathematical systems try to profit from tiny differences in stock prices in fractions of a second.
With markets largely on autopilot, executives increasingly struggle to discern the logic behind daily moves, including a stock that falls despite a positive announcement.
“The real money isn’t setting your price,” Quast said.
Unknown are whether the distortions are temporary or more fundamental.
“My sense is that it distorts price movements in the short run, but it may not make a difference in the long run,” said David Joy, chief market strategist with RiverSource Investments.
That said, ensuring that high-frequency traders don’t have special access to information or other unfair advantages is a more important concern.
Supporters argue that high-frequency trading creates a more liquid and unified stock market that can quickly correct inefficiencies.
But if markets are increasingly structured to promote trading for the sake of trading, they will do a poorer job of serving companies and investors, critics counter.
High-frequency trading has also made it more difficult for small investors, twice burned by a buy-and-hold strategy this decade, to profit from trading.
“It is important to realize it is very difficult for small active traders to compete today,” Quast said.
A popular stock such as Intel can reprice 500 times in one-tenth of a second, Quast said. Small traders are gunned down before they can even push the enter key on their computer.
Although some investors like to blame hedge funds, Quast said the stock exchanges themselves are encouraging high-frequency trading.
“The market is absolutely synthetic,” Quast warned.
If that assessment is correct, then stock markets could unravel in a big and dramatic way for reasons people don’t see coming until it is too late, he said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
