Since Michael Lewis wrote the book Flash Boys much has been theoretically discussed about how markets are “rigged,” but there has yet to be concrete, documented evidence detailed with great specificity. That is until now.

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Eric Hunsader provoking regulators and Congress over HFT

High frequency trading (HFT) research analyst Eric Hunsader, trying to provoke regulators and Congress into action through his biting criticism, today released a study that confirms the questionable behaviors Michael Lewis outlined are alive and well as you read this article.

After reviewing the documentation last night, Lewis told Hunsader his research was “just beautifully done. Clean, simple, irrefutable,” Lewis reportedly said. “I hope it gets read far and wide.”

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Hunsader claims to have been approached by a large institutional investor irate at what is considered a clear case of front running and misrepresentation. The parties are “livid” as the hedge fund trader remains anonymous, trying to expose the scheme without exposing himself to industry retribution.

Ford shares targeted by HFT firms

The event in question took place on July 11, as the stock of Ford Motor Company (NYSE:F) was quietly trading with little if any volume. The hedge fund trader wanted to take a position in the stock by purchasing 20,000 shares. No problem, he thought, as glancing on the trading terminal there were 24,800 shares being offered for sale at a price of $17.38 – a fair value, in the traders mind.

When the trader went to execute his investment thesis, however, something odd happened that appears like an old game of bait and switch. The trader used his finger to intentionally purchase 20,000, below the advertised liquidity, but shares literally changed price in a millisecond. What happened was very much like a used car salesperson surprising the buyer by saying the car steering wheel would be an additional cost after the deal had been verbally consummated.

In this case the hedge fund trader was able to purchase only 12,133 shares, while HFT firms were able to race in front of the hedge fund trader and raise the price on the balance of his trade.

Hunsader analyzes Ford’s trading activity

What really happened, according to Hunsader’s slow motion analysis, is clear. After receiving little attention, the hedge fund trader’s order to buy Ford Motor Company (NYSE:F) hit the electronic network and in millisecond HFT predators apparently saw the order coming in and created a flurry of quote activity and were able to race ahead of the hedge fund and purchase the stock or raise the price to varying degrees.

After documenting the crime scene, Hunsader calmed his boiling temper but was nonetheless aggressive. “I can safely say that 30 to 50% of displayed liquidity is in fact bullshit and will disappear before investors can access it,” he said in an interview. The bigger issue is how prevalent the practice is and how regulators continue to ignore it. “There is no gray. This is how HFT conducts its business.”

View the full research here: http://www.nanex.net/aqck2/4661.html