A new report authored by high frequency trading critic Eric Hunsader, founder of software firm Nanex, makes a key statement about the flash crash of 2010 that has been whispered in certain market making and algorithmic trading circles: HFT was to blame in the May 6, 2010 flash crash, the conclusions of which differ from official regulatory reports.
Waddell & Reed selling during the flash crash
This new study considers primarily volume and price data and shows that Waddell & Reed Financial, Inc. (NYSE:WDR) selling during the flash crash much more passive while HFT traders were more active than previously thought. The report shows there were many responsible for the crash who were not identified. The report analyzes the trade algorithm used by Waddell & Reed to execute the trades in question and notes important inconsistencies and key points that were not included in the flash crash report.
What’s the significance of Hunsader’s findings? It is important to invalidate the flash crash report because it hid the role of HFT algo’s not as a contributor, but as the primary cause, of the flash crash. This is significant because since the May 10 flash crash, HFT’s have used algorithms to manipulate markets, Hunsader claims, at an increasing rate. The improper labeling of the May 6, 2010 flash crash has in fact obfuscated the real number of flash crashes and fails to expose significant manipulation of the markets that continues today because the situation still remains a general secret.
Hunsader was provided unusual access to the Waddell & Reed to develop the study thesis
To develop the study thesis, Hunsader was provided unusual access to the Waddell & Reed Financial, Inc. (NYSE:WDR) trade data from both Waddell & Reed and Barclays Capital, the brokerage firm that executed the trades.
After taking a slow motion look at the trading that occurred, Hunsader notes the algorithm blamed from mutual fund was price sensitive and reduced trading as the market crashed. Hunsader is the only non-governmental official to have access to the time stamped trades from Waddell & Reed, the mutual fund company fingered in the official flash crash report.
“The SEC flash crash report states the HFT became aggressive, but not anywhere near the level of aggressiveness that actually occurred,” Hunsader said in an interview. “It’s like saying ‘the hockey player stole the puck after gently bumping the other player’ but what really happened is ‘the hockey player stole the puck after bashing the other player against the wall, rendering him unconscious and sending him to the hospital where he slipped into a coma.”
To view the entire report: http://www.nanex.net/aqck2/4650.html