Nanex Research

Nanex ~ 11-Dec-2012 ~ Money and Speed

Money & Speed: Inside the Black Box is a true thriller that takes us to the heart of our automated financial world. On the basis of interviews with people directly involved and data visualizations to the millisecond, a reconstruction of the fastest and deepest drop in U.S. stock markets ever.

Commentary by Eric Hunsader.

Much has happened since the filming of this documentary (end of October 2010). For one thing, I'm no longer intimidated from speaking what I know. For example, in the film, you'll see my reluctance to call the SEC report nonsense, despite prodding from Marije Meerman (the director). Instead, I sheepishly point out what they missed.

Since then, I've spoken with many people across the industry, from CEOs to network engineeers, on and off the record, and have come to understand much of what took place on May 6, 2010. Enough to say unequivocally, the SEC report published on October 1, 2010 is complete and utter non-sense.

For example, they completely misunderstand the term "liquidity" even though that word is used 249 times in 89 pages of that report. The entire opening paragraphs talk about an algo that doesn't take time or price into account, and therefore begins selling more and more contracts as volume explodes: again, that is pure fabrication. How can I be so sure of this? Because I talked to the people who actually executed the 6,438 trade executions that made up the 75,000 contracts Waddell & Reed (W&R) sold that day. I (and apparently no one else) was given those detailed trade records and matched every single one up to the 147,577 trades that took place in the eMini during that time. It is crystal clear from the data that the algo was passive. But in the film, listen to Greg Burman's response after Marije tells him what we ("other folks") discovered:
"5 different people can look at data and give you 7 different answers"
This isn't economic forecasting. This is analyzing data! Imagine a math teacher grading student's multiplication tests and a bureaucrat telling parents that 5 different math teachers might come up with 7 different grades.

Worse, and this was difficult for me to believe: the regulator never interviewed the traders that executed the W&R contracts until October 14, 2010 - that is 2 weeks after they wrote the report!


Isn't that the primary function of an investigation? You know, interviewing people who you think are guilty? If only the regulator had asked the traders about the algorithm, they would have immediately learned of its passivity (it didn't cross the bid/ask spread), and that it had price and time components. The algo turned off for 15 to 45 seconds whenever the price moved to far and/or to fast, which explains why it only sold 1,000 contracts during the time the DOW dropped 600 points. These facts directly contradict the SEC report.

Gregg Berman claims in the movie that it took the SEC 5 months to assemble the data for that one day. Five months after May 6th would be October 6th, which is 6 days after they released their final report. When did they have time then to analyse the data?

Then, Berman, in an attempt to dismiss concerns that the report only shows data aggregated on a full minute basis, drops this bombshell:
"Interesting things tend to chunk up on the one second and one minute interval."
Unbelievable: the ability to make up stories like that.

Here's what really happened. The SEC didn't have the capability to look at data in a finer resolution, but rather than admit this deficiency, they made up a story and hoped the viewer won't notice. Analyzing modern markets using 1 minute snap shot data is equivalent to inspecting one page out of a stack of paper 20 feet tall. Imagine if physicists looking for the Higgs Boson were using a student microscope!

Is it any wonder that the SEC commissioners never signed off on the SEC staff's final report on the flash crash? They knew it was riddled with errors.


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