Nanex: A nightmare on Elm Street for high-speed trading. Part 1

The nemesis of all high-frequency traders with Wall Street works in an office the size of an apartment located directly above the Bliss salon, where for $ 45 manicures and pedicures are done on Elm Street in Winnetka Village, not far from Chicago.

Before Eric Scott Hunsaderom ( by Eric Scott Hunsader ), founder of Nanex LLC , a provider of data on the stock markets, as many as four monitors showing psychedelic images jumping triangles and the points at which he is looking out for signs of illegal trading. Triangles and dots on its monitors are quotes for selling and buying shares on US stock exchanges coming out at a fraction of a second speed.

The auction schedules created by the Hunsadera company, consisting of eight people, immediately attracted the attention of literally everyone, from the state control authorities to the owners of art galleries. Even this trick was done: the teams to buy and sell shares of one of the funds were transferred to the tune of a digital piano . This infuriated some traders: they began to claim that the results of Nanex weren’t confirmed by anything, and the company itself was simply spreading rumors about another conspiracy theory.

For Hunsader, images created from data obtained from the markets are proof that firms that engage in high-frequency trading deliberately use market rules to make a profit in an environment that is not regulated by law. And while others see propaganda in Nanex reports and charts, the company's findings help initiate a public discussion of the fundamental issue of honesty in today's stock markets.

“Have you watched or perhaps read Lord of the Flies?” Asks Hunsader, using William Golding’s novel about the boys abandoned on a desert island as a metaphor for stock markets. "When there are no parents nearby, the situation gets out of control."

Photo: Getty Images

'Ticker Plant'

From the point of view of the 51-year-old Hunsader, this metaphor reflects particularly well the situation in the markets issuing quotes for the sale and purchase of shares at a frequency of 2 million per second - in 1990 this figure was only 1000 quotes per second. According to Nanex, whose tasks are processing data and providing information to users in a form known as the ticker plant, the options market issues new quotes at a frequency of more than 10 million per second.

Hunsadera’s company revealed what he said could be considered evidence of trade fraud on the eve of the government’s US employment report of October 22. October 16 Nanex system fixeda team to buy shares worth more than $ 400 million shortly before the opening of European stock markets. According to Nanex, the E-mini S&P 500 futures team was canceled “just before the start of serious sales.”

Nanex's report on these events was called “Panthers are free again?”, Hinting that these trades are reminiscent of a situation that provoked the Commodity Futures Trading Commission to force Panther Energy Trading LLC to pay fines and confiscate profits of 2.8 million dollars. This company was charged with “spoofing,” that is, using an algorithm to illegally place and quickly cancel requests to buy and sell futures contracts to artificially increase demand.

David and Goliath

“The regulator should spend no more than an hour calculating whoever did this, and no more than one day should be spent figuring out the reasons,” the Nanex report for October 16 says. "We will wait".

Hunsadera’s company is portraying itself as a kind of David struggling with industrial Goliath - wealthy high-frequency trading companies that dominate the US stock markets. And this industry began to strike back, accusing Hunsader of the fact that his company draws incorrect conclusions from its own schedules.

When last month Chris Concannon ( by Chris Concannon ), a partner in a private New York-based trading firm Virtu Financial LLC and a former commissioner of the Commission on the Securities and Exchange Commission, came to the microphone to one of the industry events, the first thing he jokes about Nanex.

“I have the honor to announce that Nanex is the sponsor of this segment of the event,” Conkannon said to the audience at the Washington Conference of the Securities Traders Association on market structuring. According to him, the motto of Nanex is: "improve the condition of markets through false information."

To be continued …