June 22, 2010

High-frequency traders were not to blame for the epic May 6 stock market crash and regulators shouldn’t hamper their ability to bring liquidity to the marketplace, CNBC’s Larry Kudlow said during a presentation at the annual SIFMA Financial Services Technology Expo.

High speed traders, who can trade millions of shares a day using sophisticated computers and complex algorithms, have garnered negative attention in some quarters following the historic market crash in which stocks briefly lost nearly $1 trillion in value as the Dow Jones Industrial Average plunged 1,000 points in less than a half-hour.

But the crash came as fears abounded that the Greek debt crisis would spill into the rest of Europe, ultimately jeopardizing the already fragile U.S. recovery, Kudlow explained. “That crackup started in Greece with all the threats of default,” said Kudlow, who served as the associate director for economics and planning during President Ronald Reagan’s first term. “The European welfare state was collapsing and the European bailout was just beginning. And the question was is Greece coming to the United States … to New Jersey … to California? So that’s what triggered the collapse.”

Kudlow said the market was able to correct itself following the drop, adding that regulators would be wrong to alter how the it functions.

“I don’t want to see the government regulators step in and deter the market processes,” Kudlow said. “I want as much liquidity and as much free trading as possible … The market will sell off and the market will come back based on events, and the whole story does not trouble me nearly as much as it troubles other people.”

Nearly 21,000 trades were cancelled as a result of the crash, and the U.S. Securities and Exchange Commission subsequently implemented a circuit breaker pilot program establishing trading pauses for individual S&P 500 stocks that see price changes of 10 percent up or down within five minutes.

Kudlow also predicted that the market rally which came on the heels of the 2008 crash is drawing to a close and advised investors to cash out before new taxes go into effect next year.

“Given the increase in tax rates scheduled for 2011 on capital gains, on dividends, on the estate tax, on private investment … you might think about taking profits if you have them in the stock market before the IRS takes them,” Kudlow said. “Because the IRS is going to come at you in a very significant way.”

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced ...