Every now and then I come across commentaries written by well informed individuals that make me question the integrity of those regulating our markets and leave me thinking, “people really need to know this.â€
Earlier this morning I had just such a feeling in reading a report written by perhaps the single most knowledgeable individual in the nation today on the inner workings of our equity exchanges.
In light of all the current focus on this topic and the question as to whether our equity markets are ‘rigged’, stick with me on this as Eric Hunsader of Nanex reposted a commentary impugning the SEC’s investigation of the Flash Crash that roiled our markets and our nation on May 6, 2010.
Hunsader pulls no punches in asserting that the SEC under then chair Mary Schapiro sold investors a ‘bill of goods’ as to what really happened that fateful day.
. . .  I’ve spoken with many people across the industry, from CEOs to network engineeers, on and off the record, and have come to understand much of what took place on May 6, 2010. Enough to say unequivocally, the SEC report published on October 1, 2010 is complete and utter non-sense.
Hunsader is playing hardball. His statement not only questions the integrity of the SEC’s report but by extension the integrity of the SEC itself.  Hunsader proceeds to methodically expose the SEC for producing what appears to be a sham report so as to appease the market and convey a message that ‘remain calm, all is well.’
The entire opening paragraphs talk about an algo that doesn’t take time or price into account, and therefore begins selling more and more contracts as volume explodes: again, that is pure fabrication. How can I be so sure of this? Because I talked to the people who actually executed the 6,438 trade executions that made up the 75,000 contracts Waddell & Reed (W&R) sold that day.
Worse, and this was difficult for me to believe: the regulator never interviewed the traders that executed the W&R contracts until October 14, 2010 – that is 2 weeks after they wrote the report!
Really.
Isn’t that the primary function of an investigation? You know, interviewing people who you think are guilty? If only the regulator had asked the traders about the algorithm, they would have immediately learned of its passivity (it didn’t cross the bid/ask spread), and that it had price and time components. The algo turned off for 15 to 45 seconds whenever the price moved too far and/or too fast, which explains why it only sold 1,000 contracts during the time the DOW dropped 600 points. These facts directly contradict the SEC report.
