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Ex-Goldman employee steals its program trading source code

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Update: The WSJ reports that Goldman Sachs didn’t cease program trading at all.  The omission of Goldman was due entirely to a technical fault by the NYSE.  However, the NYSE halted daily publication of program trading statistics after July 10.

I first saw this story on Daily Kos.  Apparently Sergey Aleynikov, a former programmer at Goldman, made off with its source code for high frequency program trading.  According to the blog Zero Hedge, Goldman Sachs ranked top in program trading activity on the NYSE shortly before it disappeared completely from the list:

This week’s NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe’s bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spotbut the entire complete list. In other words: Goldman went from 1st to N/A in one week.

Before:

June data

After:

July data

The NYT has an article just up on this.  I’ll let them tell the story:

Until a few weeks ago, Mr. Aleynikov, 39, was a computer programmer at Goldman, whose prowess in trading has long made it the envy of Wall Street.

But over five days in early June, the authorities say, he stole proprietary, “black box” computer programs that Goldman uses to make lucrative, rapid-fire trades in the financial markets. Their value, experts say, could be incalculable.

Mr. Aleynikov, however, will not get a chance to use those secrets. He was arrested by federal agents on Friday evening, as he got off a plane at Newark Liberty International Airport. He has pleaded not guilty to charges of theft of trade secrets and transporting them abroad.

The case, as detailed in a federal complaint filed in court in the Southern District of New York, throws a spotlight on the multimillion-dollar technology that is increasingly employed by the world’s biggest banks to gain an edge in financial markets.

Now I should stress that up till this point, Goldman Sachs itself has not indicted on any charges.  Nevertheless the Daily Kos post said about “rampant speculation” that Goldman may have been illegally front-running the remainder of Wall Street firms with insider information, facilitated with the recently stolen software:

Speculation is running rampant throughout the blogosphere tonight regarding matters as diverse as the fairly well-known fact that Goldman is at the heart of the government’s Plunge Protection Team, a/k/a the “President’s Working Group On Financial Markets,” (thus making this a matter of so-called national security, since the “PPT” group, created during the Reagan administration, is supposed to step in and prevent our markets from crashing), to the possibility that Goldman could have easily been “front-running” the rest of the market due to the implementation of their exceptionally fast proprietary code, identifying others’ market-making trades and strategies, then acting upon them for Goldman’s own benefit,  executing in-house trades before the third-parties’ trades were even concluded.

Some of the comments in the post note that the evidence so far is that the software is yet another speculative quant novelty, which is hardly illegitimate or unusual on Wall Street.  Despite the lack of evidence thereof, this hasn’t sufficiently answered the question as to whether the theft was of something of material value:

Maybe Goldman isn’t talking because the theft is not big enough to be a “material” event that it must be disclosed under federal law. Technically, that could well be true. After all, the FBI agent was talking in “millions” whereas Goldman counts trading revenues in billions—specifically $6.6 billion trading bonds, currencies and commodities and another $1 billion trading stocks in the last quarter. The agent describes the programs as guiding “high-volume automated trading.” That sounds like the kind of trading that can only take place with electronically-traded stocks and commodities contracts as opposed to big-dollar, personally-negotiated deals for derivatives and large blocks of stocks and bonds. Those big deals are probably where Goldman makes most of its trading profits, but Goldman won’t confirm that.

If indeed the security breach was not material, then Goldman should just say so, flatly and convincingly. Then the story could move on to such logical follow-up topics as the risks people take when they download office computer files while changing jobs. But Goldman, by not saying anything, is leaving a fertile environment for speculation and hyperbole. Right or wrong, Goldman’s name will probably soon be coming to the top in Google searches on international espionage, Russian conspiracies and computer security threats.

Judging by the price of Goldman’s stock which rose at least $3 since I first saw the news, it appears investors are either not bothered or they haven’t learned about the story yet.  But how does one explain why Goldman apparently ceased program trading altogether?  Certainly if what Sergey stole was inconsequential there would have been no need to stop program trading. These developments come on the heels of Matt Taibbi’s critical piece on Goldman Sachs first published in the Rolling Stone.   As someone who is instinctively distrustful of Goldman Sachs, the revelations which should be emerging over the next few weeks regarding the theft may shed more light on Goldman Sachs hidden activities.

In any case, excluding knowledge of the above news, even the Australian news has nothing positive to say about Goldman Sachs:

Unfortunately for Mr Taibbi – whose gifts of prose cannot be underestimated – his entire thesis was large on colour and sparse on new facts.

Thanks to reporters at The Wall Street Journal, New York Times and the New York Post, we already knew Goldman Sachs alumni had positions in governments and influential bodies around the world.

We also knew that the firm was the biggest contributor to Barack Obama’s presidential run and that key members of its management and board were at the sides of Hank Paulson (another alum) and Timothy Geithner (another alum) throughout the financial crisis.

We also knew that Goldman Sachs profited more than any other bank during the sub-prime mortgage mess and that it sold out of its positions before the downturn hit hard.

We also knew that the company had been part of talks about whether to keep its competitor Lehman Brothers afloat.

Unlike Mr Taibbi, we knew all of this – and didn’t think it amounted to sinister conspiracy. Instead we thought this is what the biggest guy on The Street does.

Update:  Bloomberg is also reporting on this:

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

‘Preposterous’

The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.”

What’s particularly chilling, as Zero Hedge pointed out, is that the implication of the bolded statement may mean that Goldman Sachs developed a program which is able to manipulate markets in illegitimate ways.  Stay tuned for more.

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Written by defennder

July 7, 2009 at 11:34 AM

Posted in Economics and business, US

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