Episode 71 ... Eric Scott Hunsader (61:57)

Started programming in 1984
Programming then not offered in college, so he taught himself
Bought a book, C Primer Plus by Stephen Prata
Had written an oscillator in Lotus 1-2-3 spreadsheet
Still uses C to this day
Used to read the Wall Street Journal, fascinated by that world
Traded for two and half years, made enough to live and buy more computers
Developed a love for writing software
Would always second-guess his trading system
Focused on writing code and quit trading
Used to use floppy disc to archive data
Sold that data online (long before the Internet)
1989, Tom Joseph's [of Advanced GET fame] company called Trading Techniques was a data customer, hired Hunsader
Had real-time streaming charts using Compaq computer and a cellphone modem brick
CQG bought Trading Techniques and Hunsader worked for them
Three years later the Internet came along
Internet Revolution was obvious to him
CQG cold to Hunsader's idea of internet-based real-time streaming charting application
Hunsader left and did it himself, wrote Java application called Livecharts, and desktop application called Qcharts
Quote.com saw Hunsader's programs and gave him a bunch of stock for the software
Within 18 months to two years went from 0 to 10,000 customers [and I was one of them!]
Lycos wanted to buy Quote.com out
Hunsader got Lycos stock in the buyout and he sold it all out in two weeks in December 1999 [great timing]
Then he founded Nanex in 2000
Wanted to design the ideal ticker plant, originally called it "Generation Five," with API on top of it
25,000 hours later he was comfortable releasing it to first customer in 2004, called NxCore feed
Data Transmission Network (DTN) his partner then and still is
No advertising for his NxCore feed
Customers are hedge funds, institutional investors, high frequency traders, even the exchanges themselves
Working with the NxCore API is a joy
An experienced programmer can quickly learn to get exactly what he wants from the NxCore feed
Other data feed providers normalize the data, NxCore doesn't
Data compression, data transmission and graphical interface all the important bits
"Serial latency cost"
NxCore collects 20 billion data points per day, a petabyte raw
1000 terabytes is a petabyte
Data is stored in triplicate in different locations
ARCA first place where he noticed penny up and down step patterns, someone testing something
Flash Crash the big event: May 6, 2010 ... SIP got crushed that afternoon
SEC couldn't even assemble the data to analyze the Flash Crash
Nanex could replay the entire day in real-time given their archived data
Analyzed the Flash Crash ... went down a rabbit hole from which he still hasn't emerged
ZeroHedge linked to the first analysis they posted about Flash Crash, then it all exploded
SIP (Security Information Processor) -- consolidated feed, should be the only feed but exchanges sell direct data feeds independently [the bastards]
US stock market has two data feeds, one is faster than the other
Reg NMS (PDF) brought high frequency trading into being
"Electronic trading brought down costs, high frequency trading brought down ethics"
High frequency trading is risk-free arbitrage, only possible since the exchanges sell direct data feeds
Exchanges collude with HFT by selling them direct data feed, which is faster
HFT has a wink-nod relationship with regulators, fined from time to time, no real change happens
HFT would be shut down if the regulators had any ethics
If there were a central limit order book, HFT wouldn't exist
Regulators wanted competition, multiple exchanges, tie it all together with SIP
HFT can front-run orders on one exchange and cancel their orders on another exchange given their faster feeds
When you talk about spreads, do you mean the spreads narrowest in a second or widest in a second? Can go from 1% to 1 cent in the space of second
"Quote-stuffing" is a term Hunsader coined ... Quote-spam
You slow down a data feed by quote-stuffing it ... more network traffic, like a tiny DDOS
Retail customers all working off the SIP ... HFT ahead of them
All about creating latency through quote-stuffing
Put noise into the system in order to slow it down
Must maintain latency tables ... must ping and test the limits all the time
HFT is theft and market-rigging ... visit the Nanex office for two hours and watch them at work in real-time
Everyone is a victim of HFT ... a billion paper cuts
You see things now, you think it's a bad tick, but it's actually 1000 trades going off, pennying down and back up in a half second
SEC says people shouldn't use stop orders anymore
Any retail investor who trades at the open is eaten alive
The regulators are corrupt, they get wined and dined by the firms they're going to work for when they leave the regulator
SEC gave Hunsader a $750,000 whistleblower award
The exchanges are the real culprits for selling a faster data feed for huge prices to HFT
Larry Leibowitz (brother of comedian Jon Stewart) is CTO at the NYSE
Leibowitz made fun of Hunsader as a conpiracy theorist on stage
Bill O'Brien has also argued with Hunsader; O'Brien a smooth talker on TV but just a soundbite bullshit artist, has no facts
Exchanges are SROs (self-regulated organizations) ... means they can't be sued
Legal immunity exchanges enjoy has really destroyed things, the root of the problem
You need someone knowledgeable and with integrity at the SEC, then HFT will go away
Sarao being singled out like that [for the Flash Crash] is terrible
Hunsader offered to work at SEC for free, won't create any new rules -- offer met with dead silence
At least 500 trades within one second, spikes down and up, no net price change -- mini Flash Crashes happen all day long
Suckering people with these "poke plays" [as I call them] ... retail can't take advantage of these because they don't execute at all exchanges
These mini Flash Crashes never happened before 2007
Anyone with a standing stop order is going to get killed these days
Tight spreads being claimed by HFT are bogus given the constant mini Flash Crashes
People at IEX have integrity
All the exchanges' income comes from selling their faster data feeds to a select few
www.nanex.net
Twitter: @nanexllc