Market researcher Eric Hunsader, one of the most vocal critics of high frequency trading (HFT), has a clear target: the core information access advantage pointed out in the book Flash Boysby the other Michael Lewis. Hunsader is involved as an expert witness in a lawsuit on May 23 to turn talk into tangible results.
HFT: Lawsuit against stock exchanges
In a class action lawsuit filed in US District court in the Southern District of New York, where much of the financial legal action takes place, the suit accuses thirteen of the major stock exchanges of providing privileged traders defacto early access to market moving information and allowing them a quicker route to the exchange when placing trades.
The lawsuit “is about broken promises,” Hunsader said in an interview. “Exchanges are selling direct feeds that provide a speed advantage, but they don’t market it as such in print. The scam outlined in Flash Boys would not be possible if there was not this two tiered advantage.”
Hunsader has been selected as an expert witness for a group of lawyers including Michael Lewis, not the author but the plaintiff’s attorney known for filing a lawsuit against 13 big tobacco firms in 1994. Ultimately those firms agreed to pay $368.5 billion to settle the lawsuit.
HFT lawsuit: Elite traders can pay to receive faster execution
The key to their lawsuit is a little known and generally undisclosed fact that certain elite traders can pay to receive faster execution and quicker access to market moving information. While these “direct feeds” have not been debated in public much, behind the scenes certain regulators and financial reformers had actively debated the legitimacy of essentially undisclosed duel feeds that allows certain traders to exit market crashes quicker than the general public and even have access to core stock price data sooner.
A core regulatory principle is that certain investors don’t have access to market moving information before other investors, traditionally considered insider trading. Warren Buffett’s BusinessWire was involved in providing similar advantages to elite traders who pay exorbitant fees to access a technical platform for quicker access to market moving information. After talks with New York Attorney General Eric Schneiderman, Buffett discontinued the practice.
Hunsader on investors unawareness of HFT
Hunsader points out that many investors were unaware that certain traders can pay to receive market moving information milliseconds before the general investor and faster execution speeds than general traders.
Hunsader says the average active investor might pay a few dollars each month to access critical market information such as stock price quotes. The exchange feed for general investors “uses technology from the 1990s,” Hunsader charges. The more expensive feeds, with the latest technology, costs $60,000 per month or more but give users access to price information before others and allow for quicker trade execution. But its not just about delivery technology. Hunsader says the key point is the information getting into what is known as the “SIP,” or Securities Information Processor.
“When Securities and Exchange Commission Chairwoman Mary Jo White talks about the SIP aggregating (information), that’s not the real issue. Information getting into the SIP at a slower rate is what matters,” Hunsader says.