Nanex’s Eric Hunsader, the guy who exposed the weird patterns high frequency traders make when they trade, has a big prediction about the next — there will be a next, he says — flash crash.
He told Forbes it’ll be caused by someone on purpose.
Somebody, says Hunsader, is using huge volumes to intentionally slow down some aspects of the market to skim profits from clueless competitors.
He gives Forbes 3 reasons why the next flash crash will be caused on purpose:
- Because the last one was caused on purpose. The average quote volume on the NYSE is 10,000 per second. At one point on May 6, somebody launched 5,000 quotes at the NYSE for the ticker of Public Storage inside of one second. None of those quotes led to a trade—but that traffic by itself took the NYSE to 25% of its stable CQS capacity. So it’s clear that one trader or perhaps more discovered that by blasting the NYSE, they could introduce added latency in the CQS feed. Knowing that most players were looking at a delayed NYSE feed, anybody in the know could make easy arbitrage plays between the NYSE and other exchanges.
- Because mini flash crashes have happened before. On April 28, for instance, the share prices of Wal-Mart and Procter dipped 50 cents for less than a second. If algorithms had been programmed knowing the dip was coming, profits are fat and easy.
- The system has shown big delays more than once since then. It seems that whenever the NYSE receives more than 20,000 quotes per second, its CQS feed, which determines where many equity orders get routed, falls behind.
It’s quite an accusation. Hunsader is coming from the camp of investors and traders who believe that high frequency trading is harming the market by flooding it with quotes that it never intends to trade on.
Many (mostly high frequency traders) counter-argue that hard evidence of HFT market manipulation doesn’t exist because it doesn’t happen. It’s illegal and HFT traders obviously stay within their legal bounds.
The recent account of an oil-trading algo that caused market mayhem last winter was the first detailed example we’ve seen of how an algo can disrupte the market. The example shows how a Chicago firm’s algo significantly changed the price of oil for a few days by accident. In the details about the oil algo, it seems there is the opportunity to use an HFT algo to disrupt the market on purpose using volume, anticipate the results, and profit. I’m confident legit firms do not.
But HFT has been around for a while now and we’d be equally surprised if no one was using the technology illegally.
(Of course we’re speculating more than Hunsader because he’s a trading software developer who’s been in the business for years; I’ve been writing about it for less than one.)
Hunsader is one of many who is sure someone’s using the technology illegally. We don’t see it because the traders do it so quickly, he says. (And because the field is largely unregulated right now.)
His examples (Walmart, Proctor, and Public Storage, and there are more in the Forbes article) of when he thinks market manipulation has occured are interesting. More like them could strengthen the case for a transaction tax and speed up tighter regulation.