I love these guys. Really. But not in a gay sort of way....
While rereading the SEC's flash crash report, Findings Regarding the Market Events of May 6, 2010, and a very similar report written at the same time by some of the same authors, we came across statements that are clearly false, and grossly mischaracterize the algorithm that executed the 75,000 S&P futures contracts and blamed for causing the flash crash. Be sure to see our recently updated detailed analysis and charts of the contracts sold by the algo.
There's this problem with hiring people who's primary qualification if wanking off while watching porn -- when they claim to do "analysis" they wind up spewing bullshit all over and eventually someone reads it and starts scratching their head as it does not make sense.
Soon after that they figure out that you claimed up is down, red is green and left is right and then the fur flies.
That's what happened here.
For those who are interested in the details, follow the link and read it. It's fascinating.
For everyone else (and if you're in the market in any form -- 401k, etc -- you ought to read this stuff because it bears on you) then here's a quick summary that should be easily-understood.
When I have a resting order in the market -- that is, I enter an order to buy or sell something at a given price without regard to attempting to hit someone else's bid or offer -- then I am providing liquidity to the market at that particular instant in time.
That is, I am adding to the depth of the order book at that given instant in time.
When I hit someone else's bid or offer (that is, I hit an existing bid or offer in the market) I am taking liquidity away as I am removing depth from the order book at that instant in time.
What the SEC report argued is that W&R, through their orders, were taking liquidity. But W&Rs orders were not hitting someone else's bids or offers -- they were all resting orders which Nanex was able to prove by matching them.
Therefore, W&R could not have caused the liquidity starvation at the root of the "flash crash" (a market can only crash if liquidity evaporates, as while a liquid market can move quickly by definition it cannot crash) and the SEC's report authors through their characterization was factually wrong.
The back-and-forth that ensued on this with Nanex, however, is pretty amusing -- and disturbing, particularly since the eventual outcome was that the author simply shut up and stopped answering them.