In the aftermath of the May 6, 2010 flash crash, which by now everyone realizes is due to HFT whose "liquidity providing" prowess has led to comparable flash crashes in both the Treasury and the FX market since, it took the SEC nearly half a year to release [11]its final report which did not find any HFT culpability for the biggest intraday market crash in history, and instead blamed it all on a small Kansas-based money manager, Waddell and Reed.
To wit [11]:
At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) [ZH: Waddell and Reed] initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position."
The rest as they say is history, and as of today, so it the person who wrote the HFT-friendly report, the SEC's Associate Director of the Office of Analytics and Research in the Division of Trading and Markets, Gregg Berman who according to a press release is leaving the agency later this month.
From the release [12]:
During his tenure, Mr. Berman worked on an analysis of the causes of the May 6, 2011 “flash crash,” on rulemaking to create a Consolidated Audit Trail, and on new rules for derivatives trading required by the Dodd-Frank Act. He also oversaw the creation of the Office of Analytics and Research and the implementation of the Market Information Data Analytics System (MIDAS), which daily collects about one billion records, time-stamped to the microsecond, from proprietary stock market data feeds. The SEC shares the data, along with its own research and analysis, on its market structure web site, enabling market participants, academics, and investors to explore key market metrics and trends.
Far more importantly, during his tenure the rise of predatory, parasitic HFTs algos continued without one word from the SEC and has led to a "market" in which virtually every move is now a stop hunt across one, more, or all asset classes.
Berman's capture by the HFT lobby is best seen in what many claim is his crowning achievement, the Market Information Data Analytics System, or MIDAS, which collects time-stamped records down to the microsecond from the same proprietary stock feeds used by high-speed trading firms.
There was, however, one problem: as we reported in 2013 [13], MIDAS was developed automated trading firm Tradeworx... "Traditionally when a problem in the market has needed to be investigated, the SEC has gone to the exchanges, the Financial Industry Regulatory Authority, and the firm that introduced the error, to diagnose the cause. But MIDAS allows the regulator to do its own assessment as well."
This is how we summarized it [13]:
... the SEC which admits it was clueless in analyzing the modern, fragmented market (yet which found definitively that the culprit for the May 2010 flash crash was Waddell and Reed, and nobody else, using what technology at the time, nobody knows), uses a platform developed by High Frequency Trading firm Tradeworx... to reach a conclusion that High Frequency Trading firms are innocent of every flash crash resulting from an HFT algo gone haywire...
Because nothing screams prudent supervisor and enforcer of HFT like using an HFT-designed platform to catch other HFTs in the act of manipulating and rigging stocks.
Gregg Berman also startted in the 2012 documentary "Money & Speed: Inside the Black Box" which positioned the now former SEC staffer against Nanex's Eric Hunsader.
This is what Hunsader, whose feud with Berman is well known to industry insiders, said at the time: [14]
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.
In retrospect, we almost feel bad for Gregg: after all in the new paranormal, in which the market is manipulated, fragmented and broken from the top (central banks) all the way to the very bottom (HFTs) with the sole purpose of pushing it ever higher in a futile attempt to restore confidence and retail investor participation in what is so clearly a rigged casino it is not easy pretending everything is fine when everything is on the verge of total collapse at any given (nano)second, and where the only recourse to coordinated selling is for the markets to break. Literally.
To be sure, however, Gregg will find a hospitable and well-paid position after spending 6 years defending the well-paying HFTs lobby. In all likelihood after taking a 2-4 month break from the industry, he will pull a Bart Chilton, and will join either HFT powerhouse Virtu, perennial accumulator of former government staffers, Goldman Sachs, or - most likely - the NY Fed's shadow trading desk and the world's most leveraged hedge fund, Citadel itself. Because for every quo there is a (s)quid.
