Eric Hunsader: The Financial System is 'Absolutely, Positively Rigged'

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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.

Click the play button below to listen to Chris' interview with Eric Hunsader (36m:14s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/eric-hunsader-the-financial-system-is-absolutely-positively-rigged/

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When I was listening to him talk, I thought to myself, "he sounds technical."  Linked in says: yep, software engineering background.  His company is small, so he's still probably involved in development.
Long ago, part of my job was writing data feed handlers; I would interface with places like Nanex to take in data from the outside world and then present it to traders.  I did more of the data handling, and less of the presentation.  So I'm quite familiar with what his company produces (gee, data requirements sure have increased), and what sorts of information he has access to.

Nanex makes a ticker plant, and that is a product where you are required to focus on speed; speed is everything for a ticker plant vendor because slow data = lost money for your customer = you get thrown out.  In the old days, traders would put displays from different vendors side by side and if one was noticeably behind the other, the abuse the slow vendor received was instant.  "We're throwing you guys out!"  So it makes sense he is keenly aware of the microsecond-level stuff because that's the bread and butter of his business.

His response with all this stuff is pretty much the same as mine would have been: dig into the data, and see what it tells me.  But my data is a pale shadow compared to what he has access to.

Hats off to him for taking a stand and being one of the good guys.

Did not realize the exchanges had legal immunity.  Nor did I realize that my little retail trades never made it to the exchange, although that does make sense.  Its wrong, of course, but those big players wouldn't want a couple of retail traders swapping stock (or options) without them getting to snag their penny.

As a former feed guy, the concept of an exchange selling a faster data feed for a premium so that some select set of participants can front-run everyone else is just so dreadfully unfair.  Back in the day, that would simply have been unthinkable.  Given the amount of money on the outside - pension funds, mutual funds, etc - one wonders just how such a situation can remain in place.  The money that the penny-stealers make must be immense, and the business model seems based entirely upon regulatory capture and bought politicians.  That's not a particularly safe platform; if the system were ever to be cleaned up, they'd all be swept away like leaves in a strong breeze.

IEX is an existential threat - it makes sense that they'll move heaven and earth to try and make sure it never sees the light of day.

From a technical standpoint, it would take very little time to clean this whole mess up, and to put an end to all this theft.  But its not a technical problem, its a corruption problem.  Like everything else these days.  Peak corruption, driven by money in politics.

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Even if the Exchange knowing abets criminal activity it still cannot be prosecuted?  If so, then no surprise everything is rigged and it ain't going to get better.   Until Mother Nature fixes it, that is.

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How can things become more hyper connected than HFTing? How could what we've learned of HFTing and peak business cycles benefit society? Could we redirect the amazing ability of HFTing's money gatherings and fund the switch from fossil fuels to the alternatives?

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"And certainly you have opened my eyes to the degree to which these people can do what they do. It is nothing personal. It is just human incentives. Humans respond to incentives. And if people can game a system they game a system. That is the nature of all of human existence. Nothing really new under the sun here but boy the tools they have got at their disposal now are just I can’t even keep up with it."

Perhaps it wasn't personal to separate King Louis XVI and his wife Marie Antonette's heads from their body.  The peasants I understand got tired of a monarchy and took steps to create change.  Consider this -

"Like the American Revolution before it, the French Revolution was influenced by Enlightenment ideals, particularly the concepts of popular sovereignty and inalienable rights. Although it failed to achieve all of its goals and at times degenerated into a chaotic bloodbath, the movement played a critical role in shaping modern nations by showing the world the power inherent in the will of the people.

It becomes personal if your the one being stolen from, or affected by the corruption, or are harmed by it, or have to watch it, or can't put food on the table, or find a job and on, and on, and on.

Of course today with Food Stamps, digital entertainment, and legal pot who and when would people get out of their LazyBoy and make a fuss?

 
 
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Gleaned from the internet highway  - from  Elizabeth Warren's, afterward in A Fighting Chance,:in discussion with Jamie Dimon

"When the conversation turned to financial regulation and Dimon began complaining about all the burdensome rules his bank had to follow, I finally interrupted. I was polite, but definite. No, I didn’t think the biggest banks were overregulated. In fact, I couldn’t believe he was complaining about regulatory constraints less than a year after his bank had lost billions in the infamous London Whale high-risk trading episode. I said I thought the banks were still taking on too much risk and that they seemed to believe the taxpayers would bail them out — again — if something went wrong.

Our exchange heated up quickly. By the time we got to the Consumer Financial Protection Bureau, we weren’t quite shouting, but we were definitely raising our voices. At this point — early in 2013 — Rich Cordray was still serving as director of the consumer agency under a recess appointment; he hadn’t yet been confirmed by the Senate, which meant that the agency was vulnerable to legal challenges over its work. Dimon told me what he thought it would take to get Congress to confirm a director, terms that included gutting the agency’s power to regulate banks like his. By this point I was furious. Dodd-Frank had created default provisions that would automatically go into effect if there was no confirmed director, and his bank was almost certainly not in compliance with the those rules. I told him that if that happened, “I think you guys are breaking the law.”

Suddenly Dimon got quiet. He leaned back and slowly smiled. “So hit me with a fine. We can afford it.”

 
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I am in Canada, trading within my retirement funds online (at my own banks  website) …been doing this since the 90's.
I found just about every time i put a stop limit sale on a stock i owned, but was concerned about, it would usually drop to that limit, sell, then continue on and have a nice UP day. I had the distinct impression someone saw a potential sell of my stock at low price, while it was on the move up, and intervened.

After a few years of this i just bought or sold at market and assumed i was mistaken, ignorant or unlucky with stop limits.

It was very interesting to hear this interview (and wonder). 

kc

 

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The same reason they always begin revolts; when they can not, or become anxious over whether they can or can not, feed themselves and their families. You are already seeing the shift towards revolutionary upheaval beginning. If the fundamental underlying causes of the destruction of the middle class in the United States are not addressed, that fear and anxiety will continue to grow. If you think Trump is scary, wait until you see who comes afterwards in an election cycle or two if things aren't fixed or get worse. 

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I founds this documentary about HFTs on YouTube. The exchanges telling HFTs what to put in their order code to skip to the front of the line adds another layer onto this interview. Super interesting stuff, thanks for getting Eric on for an interview. 
https://www.youtube.com/watch?v=kFQJNeQDDHA&ebc=ANyPxKrxH8CnuXgcugWkwpumbxOedUxaDLeO3a2FYA3jSXIR8ca7etcYCGD7j-4sGzUR7VtCNeushQRDQPYbumVWCGvR8CHTzQ

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Igor Kaparis (the CEO of International Fintech) agrees that credit is the base of the present financial system; for credit you need to facilitate customers to bring expenditure forward - that is, purchase more stuff now than they could purchase with the cash they have on hand, in return of assurance to pay principal and interest with their future profits.