Transcripts For CNBC Power Lunch 20140402 : vimarsana.com

CNBC Power Lunch April 2, 2014

Welcome to power lunch. At the nyse stocks are sitting at record highs but as we saw, it was quite a battle 24 hours ago right here at the nyse. It most certainly was. We push ahead today on this big debate on High Frequency trading on power lunch. Where are the regulators . We talk to lawmakers who come at the issue from different points of view. We also have specialists to tell us what high speed traders look for. First, how does high speed trading fit into the overall market . Who better than bob pisani to explain all of that. I bet you can say that. Algorithm. I can spell it, too. The important point is a lot of people wonder when you go to your broker and actually push a button. Let me walk you through a typical trade. Critics of High Frequency trading say these traders are scalping pennies from investors but the truths a little more complicated than that. Lets use an example. Through your broker, you send an order to buy 100 shares of ibm. That order is likely routed to a market maker and the market maker is going to try to match your order with an equal sell order, likely from their own inventory. Now, in the unlikely event they cant match the order internally, it will be sent out to a Stock Exchange or possibly to a dark pool. Thats a private trading venue thats run mostly by brokerage firms. Now, there are 13 different exchanges out there and over 40 dark pools so its really crowded, though not all those dark pools are actually open to small investors. At the exchange or the dark pool, the order might interact with a High Frequency trader. The High Frequency trader likely bought the stock a penny lower a short while earlier and is hoping to sell it to you a penny higher. But its institutional traders that are especially unhappy here. They buy and sell large orders. They have been complaining that the pennies have been adding up for years and that the market moves around them when they try to place large orders, and thats making it more expensive to trade for everyone. Supporters say High Frequency trading provides shares to buy and sell, called liquidity, and that they are required to provide the best possible price at the time under s. E. C. Rules. Thats true, but it hasnt quelled the controversy that it does increase costs. I think its actually hotter than ever, the controversy. Lets talk more about this. Bob will stay with us. We will dig deeper into algorithms as a big part of the high speed trading. What do traders look for, how do they design that. Joining us is dr. George calhoun, hes with us on the floor of the new york Stock Exchange. Hes an industry professor and Program Director of quantitative finance at Stevens Institute of technology. And cnbcs dominic chu is with us because before he turned to his tv life, he was a trader in his former life. Gentlemen, welcome to all of you. Professor, when you design an algorithm, there are different types of algos as they call them here on the floor that you can design. How does it work . How do you put one together . Well, an algorithm is really just doing mechanically what the human market maker has been doing for hundreds of years, but it can do it so much faster. The market, the volumes in the markets have gone up so much. An example i like to cite is facebook, when they did their ipo, traded more shares in four hours than the whole market traded on black monday back in 1987. An algorithm is a mathematical formula that basically says when this happens, do this, is that correct . Explain how it works. It triggers certain activity. It can be actually a very simple procedure. It just says if this happens, then buy or if this happens, send an order or cancel an order. They are actually usually not all that complex. They are very simple but extremely fast. Go ahead, finish. I was just going to say, its the technology and the speed that creates all the risks that we are now coping with. Thats another question is whether or not with an algorithm, is it the speed that is dangerous or is it the person that is using the speed that is dangerous in terms of increasing volatility . Well, the huge distinction here is you guys are right. At its very core, an algorithm is a set of instructions. Its a very complex choose your own adventure story, if something happens turn to page 25. If you want to go into the wooded hole, turn to page 24. All these things happen at great speeds with these particular algorithms and the computers that have them. What the real issue for a lot of Institutional Investors is whether or not this kind of speed will have an impact on the market and their costs. At the heart of the High Frequency trading debate is liquidity. Whether or not these big institutional buy sell orders can find homes or matches for their trades. Oftentimes, its not just the fractions of a penny that were talking about. Its whether or not trades can get done at certain prices that dont impact the market or any shares you have to buy or sell behind it. If i might jump in here, one of the claims or the statements of fact in Michael Lewis book is that its not so much speed that is the villain here or the algorithms that per se are the villain, but rather the fact that exchanges have sold access to whats known as order flow. In other words, the High Frequency traders see what you want to do, pay for the right to see what you intend to do, and get that right and then are able to use that access to beat you to the punch. Is that fair . Is that right . And if we fix that, whats to say we wont be soon trying to solve some other problem that may be an unintended consequence of the fix . I think thats absolutely right. I think the speed has happened to this market so recently that a lot of people are not ready for it. Those few that are, that have figured out how to jump ahead, theyre the ones that are getting an advantage right now. Those trading strategies are going to be fleeting. They can be corrected fairly quickly. They change very quickly. Yet for all this concern there is a requirement by law to provide the National Best bid and offer. Nobody can sell you something thats not the current price of the stock. Thats by law. No trading algorithm is going to go around that fact. But is the current price the price at microsecond number one or microsecond number five . Thats exactly the point. We are slicing time into such small increments that it becomes, i dont know, meaningless, but real time means something very different. Also, are those orders legitimate. Whether or not they are just 100 shares flashing for a microsecond and theres anything behind it. Remember, a lot of the market volatility with mini flash crashes and the flash crash happened because markets collapsed, they fell through vapor as some traders say because when times of crisis happen, some of these bids and offers, they disappear from the marketplace, causing gaps in the market that are then filled, maybe some time later. But volatility is going to be a huge concern. Maybe thats where the focus should be, not so much on the scalping aspect but where markets go in terms of the volatility or stability. That is an extremely important point. Professor, thank you very much. I will be visiting your campus tomorrow, as a matter of fact. Dom, thank you. Bob, see you in a little bit. As a matter of fact, friday, we go inside Stevens School of Technology Management and explore their quantitative finance program. By then i will be able to say the word algorithm. We are going to show you the facilities, the programs that stevens use to train wall streets next generation of traders and programmers. Looking forward to that very much. Ty . Sue, thank you. The s. E. C. Confirming there are several active investigations into High Frequency trading and heres what s. E. C. Chair Mary Jo White said yesterday during a congressional hearing. I think people would agree that there are advantages of speed but whats the impact of the advantages of speed. Is it harmful, is it not harmful, who does it harm if it harms. But these are all, you know, issues that we are very much reviewing intensively. Should high speed trading be regulated . Representative Peter Defazio is a democrat from oregon. What do you think, congressman . I think the Previous Panel was great. Its very complicated but they said should we deal with scalping or volatility, which is more dangerous. I think we need to deal with both. The regulators are looking at the scalping aspect. Volatility is a bigger problem and i think we should deal with it in the simplest way to deal with volatility is not going to be through endless regulations because wall street always figures a way around the regulations, then you have the new new thing, would be very simply to impose a very, very minuscule transaction tax which would bring a lot of the volatility and a lot of this useless high speed trading out of the market. Well, that is something that you have proposed, but a tax might well just be regarded by some of these high speed traders as another cost of doing business because the sums they make are by record, so vast that a little tax isnt going to stop them. No, no. When youre talking at the margins theyre talking about, a hundredth, a tenth of a penny per share, a three basis point tax would discourage a lot of that volatility and a lot of that High Frequency trading. Is this something that on the other side of the aisle we are going to hear later from a congressman who thinks that the industry itself will actually selfregulate, or that the marketplace will sweat out this practice. You dont agree with that . Well, we sure sweated it out in 2008 and 09. Marketplace self regulating didnt work so well. Everybody knew junk was out there, the collapse was coming, the house of cards. Michael lewis wrote a book about that, too. Seems only after someone pulls back the curtain do we begin to talk about what we need to do. This would be proactive. The European Union is moving down this path. Our Major Trading partners in europe. It would not disadvantage u. S. Firms and it would tamp down volatility everywhere. And in currency markets and commodities, you know, our real producers are really getting hit by volatility and commodities. I have talked to the airlines, the railroads, the farmers, and the end users of these products are being hit by volatility, which is, which really needs to be dealt with. Has the issue of fair markets, free markets, got any traction on capitol hill, congressman . Fair markets, free markets . I think we are all for it. But what you read in flash boys is not a fair market. It may be free for people to buy special access, anticipate calipers putting in an order for a million shares and quickly putting in an order so they only end up with 900,000. Thats not fair. The trade should be the same for me as for any institutional investor. It should be a level playing field. Really, what im asking, is congress of a mind to do something about what is described in Michael Lewis book, is congress of a mind in a very antitax house of representatives to add any kind of transaction tax, which you propose . Probably the republicans, theyre not interested in any taxation no matter how meritorious the end product investing in our roads, bridges and highways, whatever. No taxes. But the eu moves down this path, you see the reforms over there, you see they squeezed volatility out of the market. We have another flash crash, we have another Something Like 2008, the demand will be there. Weve got a solution but right now, i dont see it moving forward. Representative, thank you very much for being with us today. To dominic chu with a market flash. So shares of amazon are posting marginal gains on the day, up about half a percent so far. This comes on the heels of course of the worlds biggest Internet Retailer unveiling its new fire tv set top box. This unit which will stream video content is meant to challenge apples tv streaming product. It will be priced similarly at about 99. Amazon has said that the fire tv will be more powerful, easier to use than apple tv as well as offerings from rivals like google and roku. A controller can be bought for about 40. If you take a look at apple, google, netflix, they will all have competition with each other and it will all be about digital content. Sue . Thank you very much. We just heard from the congressman a second ago. We will get the other side of the debate on High Frequency trading when we speak with a republican lawmaker making his case for high speed trading. Plus, a massive 8. 2 magnitude earthquake off the coast of northern chile has triggered landslides, is cutting power. It sparked a tsunami warning as well. We have the very latest on this still developing story in just a moment. [ bagpipes play ] make it happen with fidelity active trader pro. Its one more innovative reason serious investors are choosing fidelity. Call or click to open your fidelity account today. Your chance to watch full seasons of tvs hottest shows for free with xfinity on demand. Theres romance, face slaps, whatever that is, pirates, helicopters, piratecopters. Argh hmm. Its so huge, its being broadcast on mars. Heroes. Bad guys. Asteroids. Available only on mars. Theres watching. Then theres watchathoning. A developing story, we are watching a powerful 8. 2 earthquake striking off chiles coast, sparking a tsunami warning and forcing the evacuation of hundreds of thousands of people. The death toll miraculously low at six. The earthquake was so powerful, it was felt 300 miles away from its center in bolivias capital. There were tsunami warnings up and down the Pacific Coast of that continent, even as far away as hawaii. We are monitoring the situation and will bring you any new developments as they happen. Sue . Stocks ticking higher as the s p and dow transports all hit new alltime highs. Right now we have the dow up 15, s p up 3 1 4 and the nasdaq is up just under two points. The question is, where do we go from here . Lets ask Giordano Lombardo at pioneer investments. Welcome to power lunch, sir. Pleasure to have you here. Thank you for having me. How does the market feel to you . We get a lot of people on cnbc, some are saying im still finding value out there and others are saying im taking some money off table, weve gone pretty far, we have hit new all time highs in a number of key indices. From your perspective in putting capital to work, how does it feel . First of all, we have to recognize that the current Market Conditions are the result of the aggressive action of Central Banks in the last few years, that have pushed most Asset Classes so both equities and credit markets up. So going forward, i think that the key question is to understand how much value is left in the markets and we believe that in the equity markets, there is still some value to be left, to be found. In credit we find much less interesting or attractive valuations. Among the equity markets we saw quite big differences between advance markets on one side, in particular the u. S. Equities that covered a lot of ground and other areas such as emerging markets which instead we see pockets of value creating. Go going forward, we need to be much more selective than was the case the last few years. What about developed europe . There are a number of people that feel as though developed europe perhaps because it has lagged behind the United States still has a little further to go. Would you agree with that or not . If you are talking about equity markets, definitely yes. Because europe had much less favorable policy than the u. S. And as a result of that, the economic strength is much lower than the economic condition much less positive than the ones in the u. S. In particular, the fiscal policy, these austerity policies have been very much upsetting monetary policy. But equity market valuations are discounting a lot of bad news in europe so we think that there is value left. Yes. You know, let me ask you about the debates that we have been having. Yesterday we had a very spirited one here on power lunch about High Frequency trading. Does the impact of High Frequency trading concern you at all and do you feel, as others do, that it actually increases your costs . First of all, its a very important phenomenon that we follow and we recognize its a major force in the market. Having said that, since we believe that it mostly impacts the market movements in the short term. We try to not to be influenced by these anomalies in the short term. Being long term investors, our stock specific decisions do not have to be influenced by these anomalies in the market, if any anomaly is created by High Frequency trading. So its a very important thing to follow but we are not overly concerned. All right. On that note, thank you so much. Thank you. Ty, up to you. As you remember, if you were watching yesterday, you saw an explosive exchange on power lunch between flash boys author Michael Lewis and bats Global Markets president bill obrien over High Frequency trading. Lewis says the market is rigged. Take a listen. Its great to see bill throw at brad the idea hes doing all this to promote a Business Model. He said that and also said shame on you. How do you react to that . I will say it again. I think hes outrageous. I think hes part of the problem. Heres what s. E. C. Chair Mary Jo White said about the market. Are the markets rigged . They are not. How can you be so confident . Sorry, got a hearing. So is she right . Is Michael Lewis right . Representative mike conaway is a republican

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