By Tyler Durden at ZeroHedge
Eric Hunsader, founder of Nanex, has been at the vanguard of warning about the dangers and the rampant fraud that the rise of high-frequency trading (HFT) algorithims have let loose in today’s financial markets.
While he usually feels like a lone voice in a world happy to deceive itself, he was shocked to receive a $750,000 whistleblower award from the SEC for his efforts. He’s been sadly less shocked to see that since the award was publicly announced, the abuses he reported have only become more extreme and frequent.
Of the situation that led to his award, he says:
The folks at the NYSE were selling their direct feed for north of $30,000 a month versus the SIP which is under a thousand dollars a month. Their customers are not buying it because it has that much more rich data. The thing that makes it worth $29,000 more is that it is faster, but that is illegal. Up until this point they deny that that is the case. And somehow it works. So the exchanges make all their money from their highest paying customers which are the high frequency traders. And the high frequency traders pay the exchanges exorbitant amounts of money to have a slight advantage.
That’s how the whole system works. It is absolutely, positively rigged. There is no question about it. It is rigged on many different levels in many different ways — for example, no retail order ever gets to see the light of day of the stock exchange. That’s one of the many eye openers. People who aren’t pros in the market don’t realize that it’s all a rigged game.
Hunsader also had opportunity at one point to access the audit trail data from the CME futures exchange, data that the central authorities almost never allow outside eyes to see. What he found was clear evidence that a very small number of very large players push prices and volume around at will to vacuum up profits at the expense of everyone else:
I got to see the Fed analysis. This is a fascinating little story. It was the Treasury flash crash October 15th, 2014 which was every bit as bad as the stock market flash crash except it was in Treasurys. The Federal Reserve wanted to get to the bottom of it. They got people together to analyze data and they had to break them into two teams – one team got to look at the cash market trading data and the other team got to look at the audit trail data from the CME which told who was buying this order. One team wasn’t allowed to see the other data set.
If you want to analyze the situation properly you have to look at both sides in order to see what’s going on here. You’ve got to see how the cash and the futures relate. But the teams were specifically not allowed do to this. People on the team that looked at the Treasury data were not allowed to see the cash market data and vice versa. This is data that is extremely hard to get because it is audit trail level. It shows who’s behind each trade or order. I got to see some of the stats from the cash side. It is just amazing the percentage of the watched trading going on. Putting in fake orders and the level of spoofing, the level of just bad acting happening.
And, once again, it was the top 10 institutions who pulled away the lion’s share of the profits. They totally dominate the market.
I’ve been apoplectic for so long I am just spent. Nothing would surprise me anymore. I really honestly don’t know how this is going to get corrected. I know it can’t continue.
But there’s more. Last August, Hunsader published a chart showing that US stock futures are routinely and suspiciously lifted in the wee hours of the night when trading volume is at its lowest. The 2:00-3:00am EST hour in particular demonstrates a remarkably predictable behavior that leaves many suspecting outright market price manipulation:
Every once in a while I look at longer term fundamentals l and, when I did that study, I had to verify it many different times and many different ways because I just didn’t believe it. Basically, between 2 and 3:00am — you buy at 2:00am and sell at 3:00am — you would have captured half of the gains and none of the draw down since 2005, which is just unbelievable that it would have that kind of weight. You would expect every hour, over a long period of time, to be equal. It should be randomly equal. But certainly the early morning hours really stand out. And I don’t have an answer.
I would have thought after I first published that chart last August the anomaly would have been ameliorated or something would have shifted because now the information is out there and I know a lot of people saw that chart – it was widely talked about. I would have expected an effect. But the only effect seems to be it has accelerated to be more egregious than it was before.