Nanex: A nightmare on Elm Street for high-speed trading. Part 2

[ First part ]

Word for word

Virtu and Nanex exchanged mutual accusations from the moment Hunsader published his report on September 20, two days after the US Federal Reserve surprised the markets by continuing the monthly purchases of bonds worth $ 85 billion that the Fed spends quantitative easing.

The report, entitled “ Einstein and a big federal robbery ”, contained data that, according to Nanex, showed that some trading company or companies benefited from the Fed’s decision, and then used a head start in a few milliseconds to start placing orders in a total more than a million dollars. A millisecond is one thousandth of a second or a value with three decimal places: with this degree of accuracy, speed is measured during races or swimmers' competitions at the Olympics. Taking into account the Nanex report, the Central Bank began to check and eventually made the rules for publishing its instructions more stringent.
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In a counter report from Virtu, it was said that the Nanex survey was conducted with “serious irregularities” due to the type of data on which it was based. Hunsader stated that Virtu needed to buy a “new calculator” and that if you read the Virtu report quite thoughtfully, it will become obvious that he does not refute, but, on the contrary, confirms Nanex’s theory that information about the Fed’s decision left Washington earlier than it became known to the markets.

Concannon did not respond to five phone calls and emails asking him to comment on the Nanex message.

Disprove me

In his office in Winnetka, Hunsader, dressed in jeans, a white short-sleeved shirt and sneakers points to about 3,000 publications containing data from his trading research, stating that he had never backed down from his discoveries.

“How do we manage to publish so many reports and never once disprove our own words?” If you cannot prove your point of view, then refute mine, ”he says. "But do not beat around the bush, stating that it seems to you that we are just trying to jump higher than our heads."

Hunsader often writes on Twitter, where he has more than 11,000 followers, but his “crusade” on the Internet is not limited to this: he gives interviews to journalists, documentary filmmakers and all those who are trying to explain the reason for today's unprecedented influence of computers on stock markets .

A large part of approx. 11,500 of his posts on Twitter contain links to the charts he created, indicating unusual patterns of stock quote behavior, as well as allegations against computer algorithms used by high-frequency trading firms. “Dirty manipulations with AAPL shares. How is @SEC_News going to deal with this situation and thousands of other similar examples? ”- this is what he wrote on Twitter on October 5, referring to the Apple stock exchange ticker and the newsletter of the Securities and Exchange Commission. [ @SEC_News - official website of the US Securities and Exchange Commission on Twitter - approx. translator ].

Market policy

The US National Market System (NMS) management system - a set of rules that six years ago allowed creating a more competitive environment for trading securities, helped to split the US Central Bank market, valued at $ 22 trillion, to a state where orders for buying and selling stocks can be given to any of 13 exchanges and 40 alternative platforms. For example, Bloomberg LP, the parent company for the Bloomberg News media corporation, works on a stock trading platform called Tradebook and is a provider of market data and market analytics.

According to Hunsadera, computerized firms that benefit from market fragmentation and the associated minor differences in share prices at different sites are not well regulated by government agencies.

The results, according to Hunsader, are expressed in the form of higher data processing fees and unexplained fluctuations in the prices of individual stocks, which makes investors worry. Along with this, according to the head of Nanex, the potential is far from being exhausted for more significant market collapses like the Flash Crash stock market crash in May 2010, when the Dow Jones Industrial Average fell almost 1,000 points in a few minutes.

Truth seekers

According to Manoj Narang , founder and CEO of Tradeworx Inc., which operates in high-frequency trading in Red Bank, New Jersey, Nanex regularly sins with misinterpretation of data and spreads misconceptions that destroy investor confidence in the market. Chapter Tradeworx Inc. compares Nanex with “truth lovers” who doubt the official interpretation of the events of September 11, 2001.

As a rule, for what, according to Nanex, looks like attempts to manipulate prices due to “cheating quotes”, there are quite trivial explanations, Narang believes. For example, he explains, what looks like an explosive growth in quotations may be a reaction of trading algorithms to a situation where the difference between the best purchase price and the best selling price rises by more than 1 penny. According to Narang, programs automatically cancel orders after exchanges change them in order to avoid markets with equal best buying and selling prices. The result is expressed in the “unintentional repetitive behavior” of the algorithms.

“The conclusions they draw usually have a clear bias towards their paranoid or conspiracy theories about reality,” says Narang. “To add fuel to the flames of all these conspiracy theories and to bring such things to a general discussion is to undermine investor confidence. And this is in a situation where there is no real basis for such behavior. ”

To simplify the work of the market, which is “spread out” on so many trading platforms, is easier said than done, said Larry Tabb (Larry Tabb), chief executive officer of the market research company Tabb Group LLC.

To be continued…