Nanex Research

Nanex ~ 1-Mar-2016 ~ Vindicated!

Dodd-Frank Whistle-blower #1 was Nanex Founder Eric Hunsader

This story in the news

Worth reading:

Honorable Mention:

Conspicuously Absent

  • New York Times
  • Financial Times
  • Bloomberg


On July 21, 2010, Congress signed into law, as part of Dodd-Frank, a new Whistle-blower program, which Hunsader wouldn't learn about for several more years. That same afternoon, Hunsader was comparing the quote time-stamps in General Electric (GE) common stock between the SIP and NYSE's direct feed (Open Book). What Hunsader discovered over the next few hours would become crucial evidence that led to the historic $5 Million fine against the NYSE on September 14, 2012. It was the first time the SEC had ever fined a Stock Exchange.

The January 15, 2016 SEC press release "SEC Awards Whistleblower More Than $700,000 for Detailed Analysis" had this to say about Hunsader's analysis:

“The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders"
When the SEC called Hunsader in June 2015 to tell him about the award, he said to them:
"I would have accepted $1 if you simply acknowledged me at the time."
This page succinctly summarizes what Hunsader was referring to about being acknowledged.

Hunsader will use the award money to pay for college education for his four daughters: basically the capitalist approach to Bernie Sander's idea to tax Wall Street to fund college education.

High-Quality Analysis and the Discovery

Nearly 6 years ago, while analyzing the May 6, 2010 flash crash in detail, we discovered one of the prime causes for the crash, and a serious violation of a regulation that governs how stocks are traded in the United States (Reg. NMS). Specifically, we found that stock quotes from the NYSE were delayed by more than 30 seconds to the public quotation feed (chart 1), relative to Open Book, which is NYSE's expensive direct feed product used mostly by High Frequency Traders (HFT).

A crucial sub-ruling in the regulations prohibits exchanges from giving stock quotes to special groups faster than to the public. This sub-rule is of such importance, that without it, the rest of the rules (Reg. NMS) essentially become meaningless.

After we pointed out the severe delay in the NYSE public quote, the exchange immediately denied there was a problem: in spite of probing phone calls from major news media such as The Wall Street Journal (Tom Lauricella and Scott Patterson), The New York Times (Graham Bowley), Reuters (Herb Lash) , Bloomberg (Kambiz Foroohar), and Risk Magazine (Duncan Wood).

To satisfy a curiosity of whether the NYSE public quote delay was unique to May 6, 2010, we ran another quote-by-quote comparison of time-stamps from the public quote and Open Book for a 30 minute trading period in General Electric stock (GE) on July 21, 2010 (see chart 2). We chose this period because there was a noticeable lag in the public quote from the NYSE versus quotes from other exchanges, allowing us to rule out the consolidation process as a source of the delay.

Once again, we detected sizable delays between time-stamps in the public quote and Open Book. These delays ranged in the hundreds of milliseconds. Though the delay magnitude was far lower than the tens of seconds discovered during the flash crash, it was still hundreds of times higher than expected.

Our first attempt at finding a cause for the delay involved comparing the trading activity in GE stock with the magnitude of the delay. Chart 2 shows the price of GE stock in red, along with the public quote delay in blue. The left price scale shows the delay in milliseconds (thousandths of a second) and corresponds to the blue vertical lines (note: there shouldn't be ANY blue vertical lines or they should be barely visible at this scale).

We couldn't find a correlation between the price and magnitude of the delay, and one does not present itself on the chart.

Next, we looked for a correlation between the number of quotes per second in GE stock and the delay, and again, found none.

We noticed that NYSE's quote was involved in crossed NBBOs (National Best Bid/Offer where bid price is greater than ask price, which is caused by a delayed quote from one exchange), in a large number of stocks. That led us to investigate whether there was a correlation between the observed delay in GE and the number of quotes from ALL NYSE stocks in CQS Tape A (the public data-feed that transmits GE).

It was! More on that in a moment.

First, we had to rule out the possibility of the delay being caused by the consolidation process (which people often erroneously point out). To do this, we looked for examples of the NYSE quote lagging quotes from other exchanges in the public data-feed. This tells us that the delay had to exist before NYSE quotes were processed by the consolidated feed.

Chart 3 below is one such example of NYSE's quotes lagging quotes from other exchanges. It shows the quote spread (shading) and trades (circles) from 2 exchanges in GE. The NYSE quote spread is shown in lighter blue, and the Nasdaq quote spread in gray. When the two quote spreads overlap, the color is dark blue.

The red area is where the NBBO crossed (ask price below bid price), which is caused by NYSE quote lagging far behind Nasdaq's quote so that when Nasdaq's ask price shifts once cent lower to 14.78, it droppes below and crosses NYSE's stale bid price at 14.79.

Note where the light gray shade shifts to 14.78 x 14.79 on the left side of the chart (14:13:13.650). The blue shade shifts to this same price almost 450 milliseconds later (right side of chart) - which corresponds with the time-stamp difference between Open Book and the public quote.

Note the NYSE trades (blue circles) appearing outside of NYSE's quote at 14.78 - just below the red box. This is another indication of a quote delay from the NYSE and not the consolidation process. We coined this phenomenon, when trades appear before quotes from the same exchange: fantaseconds and have published many detailed examples over the years.

Back to the correlation we found which shows up nicely on the two charts below which detail one minute of time on July 21, 2010. The top chart shows the delay in milliseconds between time-stamps on GE quotes in the public data-feed and corresponding quotes in Open Book. The bottom chart shows the number of quotes per millisecond (over 10ms intervals) from the NYSE into CQS (the public data-feed that carries all NYSE, AMEX, and ARCA listed stocks. GE is listed on the NYSE).

Note that whenever the total number of quotes from the NYSE into the public data-feed exceeds about 20 per millisecond (red line on bottom chart), a delay appears in the top chart at the same time. That is, when the stack of blue crosses above the horizontal red line in the bottom chart, a corresponding stack of red appears in the top chart. The longer and further the blue crossed above, the higher the delay.

In other words, a high quote rate from any NYSE stock will cause a corresponding delay in all NYSE public quotes! Anyone with this knowledge can easily cause latency on demand across many stocks, by simply blasting quotes in any one stock, a practice we dubbed Quote Stuffing.

Nanex Research