Why So Many Smart People Aren’t Happy

There are three things, once one’s basic needs are satisfied, that academic literature points to as the ingredients for happiness: having meaningful social relationships, being good at whatever it is one spends one’s days doing, and having the freedom to make life decisions independently.

But research into happiness has also yielded something a little less obvious: Being better educated, richer, or more accomplished doesn’t do much to predict whether someone will be happy. In fact, it might mean someone is less likely to be satisfied with life.

That second finding is the puzzle that Raj Raghunathan, a professor of marketing at The University of Texas at Austin’s McCombs School of Business, tries to make sense of in his recent book, If You’re So Smart, Why Aren’t You Happy? Raghunathan’s writing does fall under the category of self-help (with all of the pep talks and progress worksheets that that entails), but his commitment to scientific research serves as ballast for the genre’s more glib tendencies.

I recently spoke to Raghunathan about his book, and the interview that follows has been edited and condensed for the sake of clarity.


Joe Pinsker: One of the premises of your book is that people may have a sense of what will make them happy, but they approach those things in ways that don’t maximize happiness. Could you provide an example of that disconnect?

Raj Raghunathan: If you take the need for mastery—the need for competence—there are two broad approaches that one can take to becoming very good at something. One approach is to engage in what people call social comparisons. That is, wanting to be the best at doing something: “I want to be the best professor there is,” or something like that.

There are many problems with that, but one big problem with that is that it’s very difficult to assess. What are the yardsticks for judging somebody on a particular dimension? What are the yardsticks for being the best professor? Is it about research, teaching? Even if you take only teaching, is it the ratings you get from students, or is it the content that you deliver in class, or the number of students who pass an exam or take a test and do really well in it? So it gets very difficult to judge, because these yardsticks become increasingly ambiguous as a field becomes narrower or more technical.

So what happens in general is that people tend to gravitate toward less ambiguous—even if they’re not so relevant—yardsticks. People judge the best professors by the number of awards they get, or the salary that they get, or the kind of school that they are in, which might on the face of it seem like it’s a good yardstick for judging how good somebody is, but at the same time it’s not really relevant to the particular field.

And those yardsticks are ones that we adapt to really quickly. So if you get a huge raise this month, you might be happy for a month, two months, maybe six months. But after that, you’re going to get used to it and you’re going to want another big bump. And you’ll want to keep getting those in order to sustain your happiness levels. In most people you can see that that’s not a very sustainable source of happiness.

Pinsker: What’s the other mindset?

Raghunathan: What I recommend is an alternative approach, which is to become a little more aware of what it is that you’re really good at, and what you enjoy doing. When you don’t need to compare yourself to other people, you gravitate towards things that you instinctively enjoy doing, and you’re good at, and if you just focus on that for a long enough time, then chances are very, very high that you’re going to progress towards mastery anyway, and the fame and the power and the money and everything will come as a byproduct, rather than something that you chase directly in trying to be superior to other people.

If you were to go back to the three things that people need—mastery, belonging, and autonomy—I’d add a fourth, after basic necessities have been met. It’s the attitude or the worldview that you bring to life. And that worldview can be characterized, just for simplicity, in one of two fashions: One extreme is a kind of scarcity-minded approach, that my win is going to come at somebody else’s loss, which makes you engage in social comparisons. And the other view is what I would call a more abundance-oriented approach, that there’s room for everybody to grow.

Pinsker: I was really interested by the line you were drawing in the book between abundance and scarcity, because instantly that makes me think of economics: Economics is, in many ways, the study of things that are scarce. Can you talk about the mental processes that are at play when people are thinking in terms of scarcity?

Raghunathan: I’m not trying to argue in the book that the scarcity mindset is either shallow or completely useless. If you’re caught in a warzone, if you’re in a poverty-stricken area, if you’re fighting for your survival, if you’re in a competitive sport like boxing, the scarcity mindset does play a very important role.

Most of us are the products of people who survived in what was for a very, very long time, in our evolution as a species, a scarcity-oriented universe. Food was scarce, resources were scarce, fertile land was scarce, and so on. So we do have a very hard-wired tendency to be scarcity-oriented. But I think what has happened over time is we don’t have to literally fight for our survival every day.

I think that as intelligent beings we need to recognize that some of the vestiges of our evolutionary tendencies might be holding us back. If I’m at an advertising agency, for example, or in software design, those are the kinds of fields where it is now being shown in quite a lot of studies that you actually perform better if you don’t put yourself under the scarcity mindset, if you don’t worry about the outcomes and enjoy the process of doing something, rather than the goal.

Pinsker: Since we’re hard-wired to think in terms of scarcity, I’m very interested in what can be done to prod someone into a different mindset. One experiment you talked about in the book found that workers who received a daily email to remind them to make decisions that maximize happiness reported being markedly happier than those who didn’t get the email. Is it really as simple as that sort of thing?

Raghunathan: On the one hand, we are hard-wired to focus more on negative things. But at the same time, we are also all hard-wired to be seeking a sense of happiness and the desire to flourish, and to be the best we can be. Ultimately, what we need in order to be happy is at some level pretty simple. It requires doing something that you find meaningful, that you can kind of get lost in on a daily basis.

When you observe children, they are very good at this. They don’t get distracted by all those extrinsic yardsticks. They go for things that really bring them a lot of enjoyment. In my book I talk about when we got my son a little mechanical car when he was about 3 years old, because he saw a neighbor get that car. He was into the car for about three days. After that he wanted to play with the box in which the car came. It was just a box. He didn’t have any idea that the car cost more, or was more valuable, or more technologically advanced. He was into the box because he saw a character on a TV show called Hamilton the pig, who lives inside a box. He wanted to replicate that life for himself.

What we were trying to do in that particular study is bring that focus back into people’s attention. For example, rather than sitting in front of the TV, a father might decide to play a little game of baseball with his son. What people might do varies, but when there’s a reminder, what we discover is that—and these are studies conducted with Fortune 500 employees, undergraduate students—they make seemingly small, you might even call them trivial, decisions, but they add up to a happier life overall. This simple reminder on an everyday basis is a kind of reality check, which puts things in perspective for people.

Pinsker: What do you think it is about the messages people receive about what it takes to be successful in business that runs counter to this mindset? In other words, do you think that working your way up any professional ladder requires not thinking in terms of abundance?

Raghunathan: Daniel Pink, in his book Drive, talks about how what used to be used as motivators to employees—what he calls the carrots and sticks approach—are now being replaced by what he calls “Motivation 2.0,” which is more trying to figure out what is it that people are really passionate about. Google is a famous big company that tries to practice this, and Whole Foods is another.

I do think that we carry lots of baggage from how businesses used to operate. Simon Sinek, in one of his books, makes the argument that businesses and the rules by which businesses operate are structured along the lines of how the military used to operate—very hierarchical and scarcity-oriented. But he talks about how, actually, if you look a little bit deeper into the best leaders in the military, they tend not to be that way. So there’s been a mistaken adoption of a certain set of ideas based on how things used to operate in the past, but in fact, what’s now emerging as a much more successful approach to doing business and to being successful is having a more abundance-oriented approach.

In the big picture, the business world’s messages are a little jumbled. In business schools, I see that there’s a huge push towards corporate social responsibility and finding a passion, but at the same time, if you look at the kinds of people who get invited to come give keynote addresses, or what it is that we focus on to improve our Businessweek rankings, it’s things that are extrinsic. We invite people who made a million bucks, and we look at incoming MBA students and their outgoing salaries.

Pinsker: You mentioned earlier how easily people adapt to positive changes in their lives, and I’m familiar with the research showing that lottery winners are no happier, a year later, than even people who just as recently suffered serious injuries. That resonates with me: If you told me back in high school that I was going to be writing for a magazine, I’d have been overjoyed. And right now, I am happy in many ways, but I still have a lot of the same old insecurities and worries about the future. I assume it’s something a lot of others experience too. Can you talk about what’s necessary to steer yourself away from that mindset?

Raghunathan: That’s the plight of most people in the world, I would say. There are expectations that if you achieve some given thing, you’re going to be happy. But it turns out that’s not true. And a large part of that is due to adaptation, but a large part of it also is that you see this mountain in front of you and you want to climb over it. And when you do, it turns out there are more mountains to climb.

The one thing that has really really helped me in this regard is a concept that I call “the dispassionate pursuit of passion” in the book, and basically the concept boils down to not tethering your happiness to the achievement of outcomes. The reason why it’s important to not tie happiness to outcomes is that outcomes by themselves don’t really have an unambiguously positive or negative effect on your happiness. Yes, there are some outcomes—you get a terminal disease, or your child dies—that are pretty extreme, but let’s leave those out. But if you think about it, the breakup that you had with your childhood girlfriend, or you broke an arm and were in a hospital bed for two months, when they occurred, you might have felt, “Oh my goodness, this is the end of the world! I’m never going to recover from it.” But it turns out we’re very good at recovering from those, and not just that, but those very events that we thought were really extremely negative were in fact pivotal in making us grow and learn.

Everybody’s got some kind of a belief about whether good things are going to happen or bad things are going to happen. There’s no way to scientifically prove that one of these beliefs is more accurate than another. But if you believe life is benign, you’re going to see lots of evidence for it. If you think life is malign, you’re going to see lots of evidence for it. It’s kind of like a placebo effect. Given that all of these beliefs are all equally valid, why not adopt the belief that is going to be more useful to you in your life as you go along?

Pinsker: It’s become clear to me after reading your book and talking to you that American culture, and maybe even capitalism in general, doesn’t do very much to encourage the abundance approach over the scarcity approach. Are there any societies or cultures that in your mind have figured this out, or is it the case that society will almost always send certain messages, and it’s up to individuals to have their own counterprogramming?

Raghunathan: On the face of it, it might look like I’m saying that capitalism in general is not very good at promoting an abundance mindset. But I don’t think that that is entirely accurate. If you were to break capitalism down into two very important tenets, one is the freedom of movement of people, thought, and goods, and the freedom of choice. The second aspect is a distribution of resources according to people’s abilities rather than according to people’s needs.

That first tenet of capitalism, I think, is beautiful, and I wouldn’t let go of it. And if that ideology comes with the baggage of distribution of resources according to abilities, then I take that package, rather than a package where you restrict people’s freedom of thought and what kinds of choices they can make, even if it’s combined with a distribution of resources according to people’s needs.

Ultimately, you can’t force people to adopt an abundance mindset. They’re going to have to select it themselves, through self-exploration and soul-searching, and looking at the science. Then, some people consciously arrive at a more socialistic way of living, by choice. That’s the way in which I think this is going to work out best—for capitalism to kind of flip itself on its head to arrive at that.

Hardware is hard: How we built a hardware startup with two engineers and some free time

Hardware is hard. Building a hardware startup is even harder. The good news is that the staggering amount of innovation in rapid prototyping, 3D printing and backend-as-a-service platforms has made hardware development move at Internet-development speeds. It’s not easy, but it is faster.

When we started our company four years ago, we decided to bootstrap it until we proved there was an actual market for our product. This meant we had to build our alpha version on our own — two engineers and some free time. The world then was different than it is today, but by using the lean startup method and agile development techniques, we were able to bridge the gap and meet our goals, while staying completely self-funded.

Was it the right move? Only time will tell, but it sure was a lot of fun.

Why lean hardware?

Hardware 1

Applying the lean startup method is the best way to avoid expensive mistakes. In hardware startups, this is even more important. As makers, it’s so easy to jump straight into design and implementation, but a mistake in the initial definition can haunt you and be very hard to fix later (much more than in software).

To keep us on the right track, we go through fast iterations of LEARN->BUILD->MEASURE. The goal of each iteration is to identify the minimum effort that maximizes learning. Decide what you are measuring, collect a lot of feedback, digest it and move forward.

STEP 1: Research

Hardware 2

The basic notion of the lean startup method is that your technology, in and of itself, isn’t interesting. What is interesting is what people do with your product. This is something that is very hard to grasp for us engineers, but the only thing that matters is answering the following three questions:

  • What is your product?
  • Who is going to buy it?
  • Why will they pay you?

Now ask yourself, what’s the fastest way to answer these questions?

That’s right, go talk to potential users and customers. Before you feel you have the answers to these questions, there is no justification to write even one line of code or build any prototypes. During this stage, you need to move in very quick iterations, interviewing five people at each iteration (or 50, depending on your product and customers), reformulate your idea and start asking again. And stick to the process. By doing so, you will remove a lot of bias and maximize your learning.

STEP 2: Build

Hardware 3

Once you have that knowledge in hand, it’s time to get cracking on your first hardware MVP (Minimum Viable Product). But don’t forget, we’re here to maximize learning, not build a final product. So start by asking yourself:

  • What is it that you need to learn?
  • What is the largest risk that you want to mitigate? This could be a technological risk or a user interaction risk.
  • What are you going to measure to validate/disprove your assumptions? What kinds of tests can you do?

You will probably have a number of iterations in this stage until you get a clear picture of what it is that you’re building and who is going to use it. A rule of thumb here is, if it doesn’t have wires sticking out of it, rubber bands or duct tape, you’ve gone too far. It’s not time to refine the look and feel quite yet, but to get something that works.

STEP 3 : Alpha

Hardware 4

HJardware 5

Congratulations! You have a working prototype, and you are only somewhat ashamed of the way it looks. Now it’s time to throw it at the market.

Hardware 6

Start with smaller test sites. There is a high chance of things not working, having to replace multiple devices and having a harder time demonstrating the immediate value to the users. Use this time to build a relationship with your testers. If you’re really lucky, you’ll build a community that will stay strong and support you when you enter the market.

STEP 4: Beta

Hardware 7

After you collect data, both on the product side (usage, engagement, etc.) and on the business side (ROI, price points, user personas), you are ready to move on to your more demanding clients.

Now’s the time to start the industrial design process. Use prototypes to do real-life testing with potential users, and be sure to involve your existing customers, move fast and iterate. You can use rapid prototyping technologies to experiment with radical designs and do A/B testing — just like you would with software.

Once you have the design down, and you’ve built the electronics to support it, you’re ready for your beta. By this stage you should have nailed down your target market and customers. Make sure your beta users are the same as your target customers — this will maximize your learning. If you can, try to charge for the participation, as this will be a great signal for problem/solution fit. If they’re willing to pay to participate, they’ll likely pay for your product, too.

STEP 5: React. Fix. Improve.

Hardware 8

Your product is live, with real-life customers. It may feel like you’ve made it, but the truth is the hard part has just begun. Real users bring real problems: new demands, new use cases and new ways to break your beautiful, fragile product. (“Wait, why would you want to throw it in a puddle?”)

Problems will happen. Leverage the existing relationships you’ve built in order to increase your learning and improve your design. We use what we call react, fix, improve:

  • React. React as fast as you can, try to understand what happened and take full blame for it. (Even if the user did something crazy, it’s your fault for not thinking of it.)
  • Fix. Find the quickest way to solve this specific problem for all existing customers. (On multiple occasions, we had a full recall of all of the deployed devices.)
  • Improve. Improve your design to make sure this doesn’t happen again and, more importantly, improve your process to make sure you catch problems like this before they happen.

In the end, you’re only as good as your relationship with your customers, so this is your time to shine and prove you’re all about customer support.

Hardware 9

During this process you will go through multiple iterations, repeatedly replace old versions and end up with boxes upon boxes of old equipment. At a glance, this may seem wasteful, but this is not waste — this is what progress looks like! Waste would have been designing your final product, manufacturing thousands of it, only to find out nobody cares enough to use it.

STEP 6: Go big

Hardware 10

You’ve validated the design, your customers and your users — now it’s time to make a product. Here’s where you put the final touches on the design and start moving from small-scale to large-scale manufacturing.

Focus on the small details, like designing a user manual and packaging. Be sure to iterate and user test at this stage, as well — the unboxing experience is a very important part in the users’ life cycle and for brand building. The onboarding material could be crucial to increasing users’ engagement.

Essentially, now’s the time to focus on all those little details you may have glossed over to get a product that works and fits. Make sure all that work won’t go unnoticed and really focus on the user experience.

Summary

Building hardware is hard, but applying lean and agile methodologies could help you avoid catastrophic mistakes and gain early access to your customers. Once you embrace the possibility of failure, you will find out that not all is lost — building a strong relationship with your customers will help you overcome any pitfalls as they arise (and they will).

Like anything in life, you need to plan two steps ahead, focus on the next step and be prepared to move one step back at all times. Happy building!

This man wants to upend the world of high-frequency trading

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. The feeds can cost tens of thousands of dollars a month.

Courtesy Eric Scott Hunsader
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 four colleagues — a fifth is in Santa Barbara — 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 his colleague Nate 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.)

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.

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
Eric Hunsader at the Federal Reserve of Chicago on Oct 24, 2013.

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.

“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.)

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.

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.

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.

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.

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?”

The Platform Manifesto

1. The ecosystem is the new warehouse
2. The ecosystem is also the new supply chain
3. The network effect is the new driver for scale
4. Data is the new dollar
5. Community management is the new human
resource management
6. Liquidity management is the new inventory control
7. Curation and repetition are the new quality control
8. User journeys are the new sales funnels
9. Distribution is the new destination
10. Behavior design is the new loyalty program
11. Data science is the new business process optimization
12. Social feedback is the new sales commission
13. Algorithms are the new decision makers
14. Real-time customization is the new market research
15. Plug-and-play is the new business development
16. The invisible hand is the new iron fist

Source: PLATFORM THINKING
Copyright © 2015
Sangeet Paul Choudary,
Geoffrey Parker and
Marshall Van Alstyne
THE
PLATFORM
MANIFESTO