Investor Mason Hawkins takes stand on fast trading

NEW YORK (Reuters) - In the debate over high-frequency trading, the merits of which were aired on Wednesday in Washington, highly regarded money manager Mason Hawkins has taken a stance against the practice, unlike many of his peers.

Hawkins, whose investing acumen often is compared to fellow value investor Warren Buffett, has serious reservations about high-frequency trading, including the popular belief that it has been largely beneficial to investors.

Hawkins said equity markets are beholden to short-term professional traders, especially in the rapid-fire buying and selling of shares involved in high-frequency trading. His team in Memphis, Tennessee, scoffs at the off-repeated claim that high-frequency traders provide the liquidity -- the willingness to take the other side of a trade -- that make markets work.

"It's striking to me that on May 6 all these guys who consider themselves liquidity providers just stopped. High-frequency stopped. They shut the computers down," said Richard Hussey, chief operating officer at Hawkins' Southeastern Asset Management Inc.

Securities regulators are still investigating the dramatic plunge and sudden recovery across various markets on May 6, but in a preliminary report two weeks ago the Commodity Futures Trading Commission and the Securities and Exchange Commission pointed to a temporary breakdown in the amount of liquidity.

The key point for Southeastern is that long-term investors -- the core constituency for the SEC -- do not need high-frequency traders to allocate their capital. Yet the fast traders need that steady flow of investment to survive.

Southeastern argues that a flawed market structure has allowed high-frequency traders to unfairly insert themselves between long-term buyers and sellers, adding an unnecessary cost to the order flow of trades.

High-frequency traders "shouldn't have a structural advantage over other participants in the marketplace," said Hussey.

TRADING NOT AN END UNTO ITSELF

For Southeastern, markets should be a conduit for investors wanting to invest in businesses in need of capital. Trading should enable that function and not be an end unto itself.

The SEC on Wednesday hosted a roundtable of experts to examine key market structure issues, including high-frequency trading. The SEC did not invite Southeastern, which oversees about $33.5 billion in assets, to Washington.

The open stance against high-frequency trading runs counter to many of Southeastern's buy-side brethren who in private complain about fast trading but in public barely raise a fuss.

Gus Sauter, chief investment officer at The Vanguard Group, told the roundtable that high-frequency traders have reduced trading costs for investors over the past few years.

The issue is not as simple as many say, according to Southeastern. Displayed prices might not be accessible, while trades that are not executed also represent a cost.

Southeastern's vocal opposition is in contrast to the low profile preferred by Hawkins, who co-founded the firm in 1975.

Hawkins, a Morningstar "Fund Manager of the Year" winner in 2006, has consistently beaten the market. Over the past decade his flagship Longleaf Partners Fund has returned 6.5 percent annually; $10,000 invested in 2000 was worth $18,844 as of April 30, while the Standard & Poor's 500 index is flat in that time.

But Hawkins is standing by his shareholders; his employees must limit their investments in publicly traded companies to Longleaf Partners funds.

"It's kind of something that hits very close to home for us. In looking at what was best for our investors, we believed that this was something we simply had to take a stand on," said Jeff Engelberg, Southeastern's senior trader.

The SEC repeatedly has emphasized that its duty is to uphold the interests of long-term investors when there is a divergence of interests with short-term professional traders.

Southeastern doubts whether high-frequency trading has lowered order execution costs and improved price discovery to the benefit of both retail and institutional investors, as many brokers, academics and money managers agree.

Wellington Management Co, for example, a Boston-based money manager with about $562 billion under management, said from 2005 to 2009 its explicit execution costs for U.S. stocks have declined by 6 percent each year.

(Editing by Padraic Cassidy)