When developers at a top U.S. stock exchange needed help debugging a program that puts time stamps on quotes and trades in July, they could have hired a high-profile consulting firm.

Instead, they called a customer who runs a company out of a small office in a Chicago suburb who had weeks earlier called the exchange’s dealings with high-frequency trading firms “completely illegal” on Twitter.

The customer, Eric Scott Hunsader, and a colleague did the work in a few days — for free.

Hunsader occupies an unusual position in the investing world. Founder of a software company called Nanex, he is a market data expert whose tools for spotting patterns and solving puzzles are indispensable to traders. But he’s also a vocal critic of market structures he believes punish investors, and he frequently assails high-frequency traders, exchanges and government regulators.

Hunsader’s admirers laud his independence and zeal, though sometimes only privately. Investment firm insiders smuggle him data to bolster his arguments. His critics, meanwhile, mainly ignore him publicly, some dismissing him as a conspiracy theorist. He’s both insider and outsider, simultaneously considered an authority and a crank.

“He is able to shed light into a dark game,” said Gibbons Burke, a market watcher who worked with Hunsader at Quote.com in the mid-1990s. “You can measure his success by the caliber of his enemies.”

A self-taught programmer, school ‘came easily’

Hunsader, bespectacled and stocky at 53, grew up in Manatee County, Fla., where he recalls sailing trips along the Gulf Coast. His father was a tomato farmer, his mother a homemaker. Hunsader, second-oldest of four siblings, was a bright teen who breezed through school. “Everything came easily to me,” he said in an interview with MarketWatch.

He began trading stocks after graduating from college. Hunsader determined that he’d need to automate orders to succeed, so he taught himself the programming language C++. His first trading program, which reversed long and short positions on futures when their moving averages crossed, turned $6,000 into $36,000 in a year.

But Hunsader suspected that his success was as much due to luck as skill, and he eventually quit day trading to write software that made charts and tools for traders. In the years to come, he’d start, sell and work for a number of software companies.

In 1995, convinced that the Internet would upend trading, he quit a corporate job to write a program that displayed real-time stock and futures data online. In 1996, he sold that company to Quote.com, where he launched Livecharts, a real-time data visualization program, and QCharts, a trader workstation for Windows. When Lycos bought Quote.com in 1999, Hunsader cashed out, building the Winnetka, Ill., home where his family lives.

He founded Nanex in 2000. The three-person company compresses data from streams of equity, futures and options trades from the New York Stock Exchange, Nasdaq, BATS Global Markets and the Chicago Mercantile Exchange. Hunsader buys the data from the exchanges, paying for servers that house the data at their sites. At some $60,000 a month each, the feeds are not cheap.

Courtesy Eric Scott Hunsader

Traders use the data, which include historic and delayed information as well as real-time transactions, to make trading algorithms, while exchanges use it for research.

The Nanex office, which Hunsader shares with his colleague Nate Rock — the third employee is in San Francisco— is on the second floor of a corner building in downtown Winnetka, a North Shore suburb that is among the nation’s most expensive.

Above the quiet two-lane street and its boutiques, brick sidewalks, bookstore and a coffee shop pulse screens displaying fast-scrolling columns of black and white letters and numbers that represent billions of financial transactions made each day by the world’s financial community.

Hunsader and Rock occupy two rooms, their long desks covered with monitors. (A bookshelf in Hunsader’s office contains a copy of “Flash Boys,” Michael Lewis’ best seller about high-frequency traders.)

Before all the recent drama, I didn’t think Flash Boys would be made into a movie. Now I’m not so sure.

— Eric Scott Hunsader (@nanexllc)

A third room houses servers that hold about 80 terabytes of data. (A busy trading day produces about 1 terabyte, which would fill a new top-of-the-line MacBook Pro.) Nanex stores about 4,600 days of data, going back to 2003. “We are always buying more servers,” said Hunsader.

Hunsader works about 12 hours a day, often reaching the office before dawn. He holds evenings for family: He ended one telephone interview promptly at 5 p.m. to make sure a daughter made it to a community theater performance on time.

The rest of the day is mostly spent writing and testing software, checking email — and tweeting.

‘I peeked behind the curtains and did not like what I saw’

Exchanges began embracing electronic trading about three decades ago. Electronic trading enabled some companies to use market-moving information milliseconds before their competitors, sparking a technological arms race.

Over the past 15 years, meanwhile, the global financial market has fragmented: Where there were once three main U.S. exchanges, there are now more than 40 exchanges and alternative trading systems.

And high-frequency trading companies have largely replaced traditional broker-dealers, using algorithms instead of human traders to make decisions in milliseconds, mostly in response to orders made by other algorithms.

Technology has made trading faster and more efficient. But the system is also more opaque, and some wonder whether high-frequency trading companies are profiting at the expense of institutional and retail investors.

“There are probably about 5,000 people who know how the trading system works but none of them will speak about the way these high-frequency firms make money,” said a financial industry insider, who spoke on the condition they not be named because their employer had not authorized them to discuss the matter publicly.

On May 6, 2010, the Dow Jones Industrial Average plummeted nearly 1,000 points, then its biggest intraday point drop ever. A government investigation blamed a big order that triggered a selloff for the “Flash Crash,” but couldn’t identify the structural problem that led to markets plunging 10% in 20 minutes before rising again.

Hunsader’s research, published that June, suggested that high-frequency trading companies responded to the first big order by flooding the market with orders that were withdrawn before they were filled, overwhelming the central feed of pricing information other investors needed to complete trades.

The practice, Hunsader says, created illusory liquidity that led to the “Flash Crash” and other dramatic market events that followed. (He coined the term “quote stuffing” to describe it.) “It was a bit like a denial-of-service attack on a website,” said Hunsader. “The system can’t handle it and crashes.”

Hunsader, sure he’d identified a core structural issue, later published more than 2,000 more reports — some a few sentences, others more detailed explanations of how he says markets are manipulated.

“I peeked behind the curtains and did not like what I saw,” said Hunsader.

In the reports, and on social media, he criticizes high-frequency traders, which he says use technology to break Securities and Exchange Commission trading rules; exchanges, which he says benefit from immunity from prosecution and turn a blind eye to wrongdoing; and regulators, who he says don’t do enough to protect investors.

Let’s review the 3 main places US Stock trades execute
Lit pools, Dark Pools, and Cess Pools pic.twitter.com/1QeS7aDrTi

— Eric Scott Hunsader (@nanexllc)

Quote-stuffing and other, similar tactics can lead to prosecution if they are used to manipulate markets. But prosecutions of companies and investors that abuse them have been relatively rare, which Hunsader and other critics say is because the exchanges, which oversee trading rules, don’t investigate alleged abuses by high-paying data customers vigorously enough.

Spokesmen for BATS and the CME said they watch carefully for potential violations of trading rules as they seek to protect investors, prosecuting criminal behavior.

U.K. citizen Navinder Singh Sarao, charged with commodities fraud last year in connection with the “Flash Crash” 2010, is fighting extradition to the U.S.; Michael Coscia was found guilty of manipulating futures prices last year, the first time prosecutors used 2010 laws against “spoofing.”

“We vigorously monitor the market for bad behavior, and we prosecute violators of our rules,” said a CME spokesman. The NYSE and Nasdaq declined to comment on Hunsader’s characterization.

Hunsader’s research has made him a sought-after adviser to traders, broker-dealers and academics. When unusual events — such as the dramatic plunge in the equities market on August 24, 2015, when the Dow fell more than 1,000 points in 30 minutes — happen, journalists and investors pelt him with calls and emails. And he’s been invited to discuss market structures at the Federal Reserve of Chicago.

Courtesy Eric Scott Hunsader

Hunsader mainly uses social media to spread his viewpoints, at times tweeting dozens of messages a day to nearly 72,000 followers who include major exchanges, banks, regulators, traders, portfolio managers and journalists. He frequently illustrates his posts with charts, clips from news articles and screenshots of other peoples’ tweets. Hunsader calls his tweets “pure, unfiltered news.”

Dennis Kelleher, president and chief executive officer of Better Markets, an advocacy group that supports tougher regulation of financial markets, calls him “completely independent and ruthlessly honest.”

Hunsader often attacks big market-makers Citadel, Virtu Financial and KCG, and their executives, directly. And he has singled out Modern Markets Initiative, a lobbying group for the HFT industry, and attacked high-frequency firms and their management directly, accusing them of creating a system that enriches them at the expense of clients.

Some might say that, in a way, Citadel has taken Bernie Madoff’s place: https://t.co/335D6NS7qB

— Eric Scott Hunsader (@nanexllc)

“Whether people want to admit it or not, he has a voice in this debate,” said Brad Katsuyama, CEO of IEX, an alternative trading system.

In person, Hunsader is amiable and polite, preferring chatty conversation to formal interviews. He particularly enjoys talking about his family, and takes every chance to brag about his four daughters’ accomplishments.

His public persona, however, can be unyielding. On Twitter, he has called one reporter a “shill”, said another lacked “balls,” and told followers to ignore a market research firm’s CEO to save time and “a few IQ points.” He recently added a Wisconsin congressman to a “Wall of Shame” and used an expletive to describe a television network. (MarketWatch has also been targeted for criticism.)

Just watch. Citadel will “encourage” academics to “show support”. Outfits like Marketwatch will lap it up https://t.co/bmP00beMj7

— Eric Scott Hunsader (@nanexllc)

Citadel and KCG declined to comment for this article. Virtu did not respond to several emails requesting comment. Asked to respond to Hunsader’s opinions, Bill Harts, CEO of Modern Markets Initiative, said via email that the group was “unaware that Mr. Hunsader has conducted any notable research” on high-frequency trading.

Hunsader is a supporter of the IEX trading platform, owned by asset managers and venture capitalists. Unlike other exchanges, IEX has instituted a 350-microsecond delay to execute trades, which the company says levels the playing field. Hunsader says data show that IEX has the highest percentage of trades filled at the midpoint between the bid and ask of any exchange, an indication of fairness.

Exchanges have legal immunity and the SEC is playing stupid, so the only solution right now is IEX

— Eric Scott Hunsader (@nanexllc)

IEX, which executes about 2% of all U.S. stock trades, wants approval to become a registered national securities exchange. The company applied in September, and the SEC requested a three-month extension after more than 330 comment letters were filed in response. Most were supportive, though the established exchanges and some high-frequency firms, including Citadel, argued against the application.

Worries of more damaging market events — and a loss of confidence in markets

Hunsader says a belief in fairness and transparency underpins his concerns. Current regulations are sufficient to ensure protection for investors, he says, but exchanges and market makers don’t abide by the rules, and regulators don’t hold them accountable, in part because they’ve been slow to adopt technology that would help them.

High-frequency traders, he says, get away with practices that “are killing the diversity of participants. As [they] get a larger and larger share of trades, you are going to get more and more of these damaging market events” like the one in August 2015.

He laments the lack of a consolidated audit trail, or CAT, a stream of time-stamped data on virtually all quotes, orders and executions, as well as customer information, that would represent unprecedented transparency into stock, future and options trading. It would help regulators monitor for anomalies that precede swings in asset prices, Hunsader says. Without it, he says, the SEC lacks credible evidence of wrongdoing.

Some agree with Hunsader. “As speed and complexity have become almost insurmountable forces in our marketplace, effective oversight simply cannot happen without the CAT,” SEC Commissioner Kara Stein said in September. The SEC declined to comment for this article.

“Markets have gone light years ahead while the surveillance system is outdated,” said Joe Saluzzi, co-founder of Themis Trading and a critic of high-frequency traders.

The SEC ordered the CAT’s creation in 2012, outsourcing it to a partnership of national securities exchanges and associations known as self-regulatory organizations, which are responsible for self-policing members including the NYSE, Nasdaq OMX, BATS, Chicago Board of Trade and the Financial Industry Regulatory Authority (Finra), an independent, not-for-profit organization authorized by Congress to regulate market participants.

Guidelines for the project indicated that it would be implemented in 2015. There have been more than 700 meetings to discuss parameters, costs and vendors, according to the Financial Times. As of November, there was only a shortlist of potential vendors — Finra, SunGard and Thesys, which the SEC is reviewing.

This frustrates Hunsader, who calls the task “obscenely easy” since he is already able to collect similar data through his subscription feeds, albeit without participants’ IDs. “The Consolidated Audit Trail will NEVER get built,” he tweeted recently.

@JoeSaluzzi There will never be a CAT. There will never be a CAT. There will never be a CAT.

— Eric Scott Hunsader (@nanexllc)

Spokespeople for the partnership and, separately, the SEC declined further comment on the project.

Hunsader also laments the legal immunity afforded the exchanges, which can’t be sued if, for example, an investor believes others had access to information that gave them unfair advantages.

Why doesn’t someone sue the exchanges for doing that?
A: They have legal immunity. https://t.co/PkSkSA6lUA

— Eric Scott Hunsader (@nanexllc)

Granted immunity when they were created as nonprofit membership organizations because they are regulated by federal agencies, some say they should have lost it when they became for-profit corporations. Without it, Hunsader said, it would be easier to hold exchanges accountable to market participants.

He points to a class-action suit that accused the major stock exchanges of making data available to high-frequency traders before the rest of the investing public. That case was dismissed by a federal court last year, the judge saying the court lacked jurisdiction; the decision was appealed.

“If exchanges are stripped of their legal immunity, legal cases and market forces would sort out the problem,” said Hunsader.

And he says the exchanges’ fines for quote-stuffing and other forms of wrongdoing are too low. “A $75,000 fine for abusive behavior is like instituting a 10-cent speeding ticket,” he said.

Caught going 200 mph down 5th Ave on a busy day during lunch hour.
Drunk
Wall Street Fine equivalent? 1¢

— Eric Scott Hunsader (@nanexllc)

Hunsader is adamant about fairness and the rule of law in interviews, publications and social media postings. He says he fears that the problems he has identified will erode investor confidence in the system, damaging markets beyond repair.

“Once people realize the system is rigged against them, they will not participate,” Hunsader said. “What will happen to the crown jewel of the United States?”

True to form: here’s Hunsader’s take on this article:

Finally read the Market Watch piece on me today (I specifically asked them not to run it) Meh. https://t.co/ToP4eHM8vC

— Eric Scott Hunsader (@nanexllc)

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