Eric Hunsader: SEC Report On Flash Crash 'Complete And Utter Nonsense'

Every now and then I come across commentaries written by well informed individuals that make me question the integrity of those regulating our markets and leave me thinking, “people really need to know this.”

Earlier this morning I had just such a feeling in reading a report written by perhaps the single most knowledgeable individual in the nation today on the inner workings of our equity exchanges.

In light of all the current focus on this topic and the question as to whether our equity markets are ‘rigged', stick with me on this as Eric Hunsader of Nanex reposted a commentary impugning the SEC's investigation of the Flash Crash that roiled our markets and our nation on May 6, 2010.

Hunsader pulls no punches in asserting that the SEC under then chair Mary Schapiro sold investors a ‘bill of goods' as to what really happened that fateful day.

. . .  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.

Hunsader is playing hardball. His statement not only questions the integrity of the SEC's report but by extension the integrity of the SEC itself.  Hunsader proceeds to methodically expose the SEC for producing what appears to be a sham report so as to appease the market and convey a message that ‘remain calm, all is well.'

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.

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!

Really.

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 too far and/or too 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.

“Complete and utter nonsense . . . fabrication. . . never interviewed. . . contradict.”

Hunsader has the SEC and former chair Mary Schapiro on the ropes and throws the knockout in his conclusion:

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.

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.

Wow. As if that statement does not add fuel to the fire of those who question the SEC's competence then if not now to properly oversee our markets. But the bigger question is “did former SEC chair Mary Schapiro lie to the American public in attempting to explain what really caused the Flash Crash?”

Let's get Mr. Hunsader and Ms. Schapiro in the same room and on national television for a public hearing. Let's embrace the virtue of real transparency so as to learn the truth about the Flash Crash and the current ongoing implications for managing risk.

I strongly maintain that the presumption of meaningful investor protection remains the greatest risk in our markets today.

Thank you Mr. Hunsader for shining an ongoing light into dark and dangerous corners of our markets.

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.