High-Frequency Traders Like ‘Rats’ in a Granary: Munger


Allowing high-frequency computer traders into the stock market is like letting “rats in the granary,” Warren Buffett’s right-hand man said in an exclusive interview on CNBC's “Squawk Box.”

“Take the rapid trading by the computer geniuses with the computer algorithms,” said Charlie Munger, vice chairman of Buffett’s Berkshire Hathaway, “those people have all the social utility of a bunch of rats admitted to a granary.”

The rebuke of high-frequency traders (HFTs) comes nearly two years to the day since the so-called “Flash Crash” on Wall Street when the Dow Jones Industrial Average plunged nearly 1,000 points before quickly recovering.

In the aftermath of the May 6, 2010, whipsaw, HFTs were blamed for exacerbating the volatile moves, and measures were put into place to halt trading in single stocks when their prices moved 10 percent.

Munger told CNBC this weekend at Berkshire’s annual shareholders meeting that he would like to see computer trading eliminated entirely by putting into place “the right incentives [so] the gamblers couldn’t win on the short-term trading.” He suggested possible higher taxes on gains from short-term trades.

As a disciple of Buffett’s value investing philosophy, Munger thinks investors should be in the market for the long-term.

Many individual investors left the market after the 2008 financial crisis and have yet to return, however. Even though the Dow industrial average closed at four-year highs last week, trading volume continues to be light.

“What we have to understand is that the equity market is something that shouldn't be viewed in a straight line,” Abby Joseph Cohen of Goldman Sachs told CNBC’s “Street Signs” on Monday. “Many investors in the period before the credit crisis became lulled into a sense that things would move uni-directionally. That's not the case.”

The latest data from the Investment Company Institute (ICI), a mutual fund trade group, showed that domestic equity funds had estimated outflows of $1.6 billion for the week ended April 25.

“Investors are quite nervous about the equity market,” said Cohen. “One of the things that will restore confidence will be not just improved performance in the equity market — we are in fact at prices that are double what they were at the bottom — but also ongoing improvement in the economy.”

Looking out six months, investors are getting more bullish though, according to the American Association of Individual Investors. The latest AAII Investor Sentiment Survey shows the largest uptick among the bulls and an even greater downtick among the bears for the week ending May 2, 2012.