Eric Hunsader, a software maven who coined the phrase "quote-stuffing" and created graphics to show how alleged market manipulation worked, said regulators dismissed his extensive research in last week's "flash crash" report.
The findings by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said a sale of Chicago Mercantile Exchange stock futures worth $4.1 billion helped trigger the meltdown in U.S. stock prices on May 6 and laid the blame on a lack of liquidity in markets that day.
Backers of high-frequency trading, who say they have been unduly blamed for the market's gyrations on May 6, lauded the regulators' findings.
But Hunsader said regulators largely ignored his "quote-stuffing" theory which argued that high-frequency traders had contributed to the crash by flooding the market with so many orders that it delayed the posting of prices to the consolidated quote system.
"It just seemed to me too much ink was devoted to try to discredit theories without any evidence, without any basis, other than just, 'We looked at it, we talked to these people, and now, we dismissed it,'" Hunsader said.
"Obviously they didn't follow up. I felt everything I sent to them went into a black hole," said Hunsader, who runs Nanex, a four-person data provider shop in Chicago.
Regulators said in their report released on Friday they did not "believe significant market data delays were the primary factor in causing the events of May 6."
A nearly 700-point drop in the Dow Jones industrial average during the day on May 6 was set off by a sale of 75,000 e-mini S&P 500 Index futures contracts, the report said.
Those transactions were initiated by single trader, identified by Reuters as money manager Waddell & Reed Financial Inc of Overland Park, Kansas.
The SEC did not immmediately respond to a request for comment.
Hunsader drew attention in July when he gave names such as "Blue Bandsaw" and "60-Step" to algorithms used by high frequency traders that he said were designed to trip up or prey on orders.
Andrei Kirilenko, the CFTC's senior economist, said in July that regulators took Nanex's research "very, very seriously."
A PACKED ROOM
Kirilenko had contacted Nanex in late June, and Hunsader gave a presentation at CFTC headquarters in Washington in early July in a room packed with dozens of people, Hunsader said.
Nanex provided its software to SEC staff, and Hunsader said that the SEC was the single largest outside visitor to his Web site after he posted a detailed interactive timeline of trading on May 6 during the 20-minute market plunge and recovery.
Not only did regulators dismiss his observations, Hunsader said, they made a hash of trading data that exchanges provided them because they relied on one-minute intervals -- a far too simplistic approach to understanding the market, he said.
"When we first did this, we did it on a one-second basis and we didn't really see the relationship between the trades and the quote rates until we went under a second," Hunsader said.
"Clearly they didn't have the dataset to do it in the first place. One-minute snapshot data, you can't tell what happened inside of that minute," he said.
Regulators acknowledged in their May 6 findings report that there has been considerable attention in the media regarding data delays, but said little else. "We agree that this is an important topic that should be addressed," the report said.
"We need to make sure those truly behind the flash crash are held accountable. It was not HFT, it was a mutual fund trading on fundamentals that was supposed to be representing long-term investors," David Cummings, founder and chairman of Tradebot Systems Inc, a large automated trading firm based in Kansas City, Missouri, said in an e-mail.
(Editing by Padraic Cassidy)