Tags: Dreman | high | frequency | vultures

David Dreman: High Frequency Traders Are Vultures

By    |   Friday, 10 February 2012 08:39 AM

Legendary stock investor David Dreman doesn’t think too highly of high-frequency stock traders.

“Would you call them vulture investors?” Steve Forbes, chairman of Forbes Media, asks him in a recent interview. “I would,” says Dreman, chairman of Dreman Value Management.

High-frequency traders account for about 55 percent to 65 percent of market volume on average, and in the volatile days of August and September, it may have been up to 85 percent, he says.

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“I think they really are very dangerous for the average investor, because they scare both professionals and amateurs out of the market,” Dreman says. “I mean, you’re just seeing these enormous mutual fund redemptions because of them.”

In addition, the high-frequency traders tend to act in unison, he says. Maybe that’s just coincidence. “But when one sells, another will sell almost instantaneously,” he says.

“They accentuate the downturns. And similarly, if the Dow rises 100, 150 points, they’ll be very, very long.”

One way for individual investors to cope with this situation is by purchasing exchange-traded funds (ETFs), Dreman says. “With this enormous volatility, they give you more diversification,” he explains.

Interestingly enough, high-frequency trading appears to be sliding in Canada, according to a new report from brokerage ITG Canada.

Study author Doug Clark says it’s on the wane in other markets as well, indicating that competition among high-frequency traders has risen to the point that it’s difficult to make money, The Toronto Globe and Mail reports.

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