Investment guru Leon Cooperman says the SEC needs to investigate computer trading for causing “Wild West” trading volatility in stock markets.
The Omega Advisors founder blamed officials at the Securities and Exchange Commission (SEC) for failing to address the impact computerize trading has had on the broader market and how it exacerbates volatility during market swings.
“I think your next guest ought to be somebody from the SEC to explain why they have sat back calmly, quietly, without saying anything and allowing these algorithmic, trend-following models to wreak havoc with what has, up to now, been the best capital market in the world,” Cooperman told CNBC.
“In the mid-1930s, they instituted the uptick rule to deal with the abuses of 1929. It worked effectively for 70-odd years, they took it out in 2008 for some unexplainable reason,” he added. “And they created a Wild, Wild West environment in the stock market,” he said.
“Bear markets don’t materialize out of immaculate conception. They come about from certain fundamental reasons the stock market is seeing,” Cooperman said. “The no. 1 cause of a bear market is the stock market smelling an oncoming recession. I won’t cite all the economic data, but there’s just no signs of recession.”
Cooperman spoke as U.S. stocks clawed most of their way back from a nearly 800-point slide Thursday that at one point had wiped out the market's gains for the year, the Associated Press reported.
An early plunge briefly knocked more than 700 points off the Dow Jones Industrial Average as the arrest of a senior Chinese technology executive threatened to cause another flare-up in tensions between Washington and Beijing.
The sell-off eased by late afternoon, however, after The Wall Street Journal reported that the Federal Reserve is considering breaking with its current approach of steady interest rate hikes, favoring a wait-and-see approach. That was relief to investors worried that the Fed might raise interest rates too fast, which could choke off economic growth.
The only thing possibly scarier than machines running wild is that there is no clear Wall Street consensus of just what is freaking out markets.
It would be nice to write the market’s convulsions off to liquidity failures, or tariffs, the Federal Reserve or tech valuations. But for the people living through these swings on trading desks, none of those explanations does the trick -- and that’s what really worries them, Bloomberg reported.
Markets have grown so jittery that moves seem detached from the fundamental or technical analysis that traders use to underpin investment decisions. Thursday alone brought the biggest reversal for the Nasdaq 100 Index since April, a swing of almost 3 percent amid relatively little news. That was after the overnight futures session began with so much selling pressure the exchange operator had to pause trading to ensure orderly execution.
“The market truly is trading off of headline risk, that being across the board,” said Scott Bauer, chief executive officer of Prosper Trading Academy. “There’s never been a time in my 30 years of professional trading where there have been so many hot points at one time, any of which could make the market move on their own let alone multiple headlines at once.”
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