Goldman: Pwned? Chicago Connection, Corporate Espionage

[Rick Reuben]

I posted on this odd change in NYSE reporting of program trading two weeks ago:

Karl Denninger explains the latest parlor trick designed to shield market manipulation by the kingpins:

In yet another move to make a mockery of so-called market transparency, and again with mad props to Zerohedge, we have this:

The Exchange has filed with the SEC to implement the decommissioning of the DPTR requirement following the July 10, 2009 trade date. Accordingly, the last required submission of the DPTR will be on July 14, 2009, which is the second business day after the last trade date for which the DPTR is required.

What this means, in short, is that the ability of people (like you and I) to see the fact that a handful of banks, most specifically Goldman Sachs, constitute the majority of NYSE trading volume - and they're trading for their own book, not for customers, will no longer be disclosed.

This "back and forth trade" between a handful of institutions is nothing more than the old "pump and dump" game that has been played in the OTC market forever - and almost always screws the individual investor.

This is no different than you and I selling a house back and forth between us repeatedly, each time at a higher price. We both appear to be geniuses as we're both making a "profit", right?

Well, no. One of us is destined to take a horrifying loss if we do not find a sucker to make the final transaction with.

The embedded scam is that real gains require real parties at interest and not a closed system of a couple of guys passing an asset back and forth in a transparent attempt to "bait" someone else into becoming the sucker to offload that asset to.

Suddenly, there are MANY new angles to this story, reported by Reuters, Cryptogon, and zero-hedge:

Did someone try to steal Goldman Sachs’ secret sauce?

While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.

The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.

The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.

The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The federal charges also raise serious questions about the safeguards Wall Street firms deploy to protect their proprietary trading systems.

The criminal case began to unfold on the evening of July 3 when Aleynikov was arrested by FBI agents at Newark Liberty Airport, after returning from Chicago. Aleynikov had just started a job with another firm in Chicago, after leaving the big firm in NY in early June. It appears the financial institution allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.

On July 4, Aleynikov was processed on a “theft of trade secrets” charge in a criminal complaint that was filed in federal court in Manhattan. As of this afternoon, he was still being held in federal custody pending posting of bail.

A Goldman spokesman declined to comment on the incident. A spokeswoman for the US Attorney in the Southern District of New York didn’t comment. Authorities reportedly took all the computers from Aleynikov’s home in New Jersey.

Sabrina Shroff, Aleynikov’s lawyer, says the facts will bear out that her client is innocent. She’s hoping he will be released from custody soon.

His wife, Elina, says her husband is innocent. Speaking in a phone interview from the couple’s New Jersey home, she says her husband worked hard for Goldman Sachs and has been a good citizen–noting he’s lived in the US for 19 years. She seems mystified that federal authorities would arrest him on the eve of a holiday.

The Federal Bureau of Investigations, in charging Aleynikov, says he began working for the major financial institution in May 2007 as a computer programmer and left in early June. That would appear to match the description of a man named Serge Aleynikov, as it is listed on the social networking website LinkedIn.

The bio information for Aleynikov on LinkedIn says he joined Goldman in May 2007 and was vice president for equity strategy. The bio says he was responsible for “development of a distributed real-time co-located high-frequency trading platform.” In his own words, he goes on to describe the platform as “a very low latency (microseconds) event-driven market data processing, strategy and order submission engine.”

The case against Aleynikov may explain why the New York Stock Exchange moved quickly in the past week to alter its methodology for reporting program stock trading. Goldman often was at the top of the chart–far ahead of its competitors.

On the week ending June 19, Goldman, for instance, was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didn’t appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE announced it would change some of the data for calculating the trading report. The Zerohedge blog was all over this controversy a week ago.

And now Tyler Durden of ZeroHedge has come in with his own excellent analysis of this strange, strange criminal case. I highly recommend reading it.

It’s possible Goldman asked the NYSE to alter some of its reporting methodology after the firm discovered that someone may have infiltrated the proprietary computer codes it uses.

Here’s the way the criminal complaint describes the Goldman trading platform:

The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.

Meanwhile, federal authorities appear to believe Aleynikov, who has lived in the US for more than a dozen years but frequently travels back-and-forth to his native Russia, may have had help. The German website that Aleynikov allegedly uploaded the stolen information to is registered to a person in London. That, of course, gives rise to speculation about this all being a case of international espionage.

This case is quickly unfolding and there’s plenty more information to unearth about Aleynikov. For instance, it appears that he and his wife are competitive ballroom dancers–there are some videos of them on youtube.com. The job he took in Chicago, according to the criminal complaint, paid nearly three times more than his $400,000 salary at Goldman.

Which Chicago firm hired Aleynikov? Inquiring minds want to know. But you can rule out the giant hedge fund conglomerate Citadel. It’s not them.

Also there’s more to learn about anyone who might have been helping him and the fallout this may have for Goldman. When he was arrested, Aleynikov told the FBI he “only intended to collect ‘open source’ files on which he had worked, but later realized that he had obtained more files than he intended.” But authorities say after he uploaded the files he encrypted them and “erased” the program he used to encrypt them.

It’s not clear why the authorities and apparently Goldman waited so long to move on Aleynikov, even though they knew he had uploaded the information weeks ago.

One question investors need to ask is whether this incident will have any impact on Goldman’s second-quarter earnings. The alleged wrongdoing by Aleynikov took place at the beginning of the month–although it’s not clear if it had any material impact on automated trading.

See also:
http://market-ticker.denninger.net/arch ... Pwned.html

And:

Is A Case Of Quant Trading Sabotage About To Destroy Goldman Sachs?

In the 5 days immediately preceeding his departure from “Financial Institution” (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain’s affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this “code” not only to Goldman but to the highest bidder. After all, from the affidavit: “certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.

Fascinating. For me, anyway.

[ktone]

Karl Denninger is the obnoxious former ISP operator who owned the widely despised MCSnet in Chicago during the net boom in the mid nineties. At one point if you wanted real internet in Chicago he was the only choice and he knew it and milked it. Wanker and in my opinion not completely honest. I, for one, wouldn't trust his blog.

[hopelesshomo]

This case is quickly unfolding and there’s plenty more information to unearth about Aleynikov. For instance, it appears that he and his wife are competitive ballroom dancers–there are some videos of them on youtube.com.

um... ok.

[bassness]

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“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.”…

“Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,” said Larry Tabb, founder of TABB Group, a financial-market research and advisory firm. “The more sophisticated market makers — and Goldman is one of them — spend significant amounts of money developing software that’s extremely fast and can analyze different execution strategies so they can be the first one to make a decision.”

Someone could use the code “to implement the same strategies and maybe on certain stocks they can be faster and, in effect, take away money that would normally be Goldman’s,” Tabb said in a phone interview. “The second thing that they can do is actually analyze the code so that they know what Goldman’s going to do before Goldman does it and kind of reverse engineer Goldman’s strategies and make money basically at the expense of Goldman.”

So, this code is a risk in anyone else's hands but Goldman's because they would be making money at the expense of Goldman? The criminals here are Goldman who have been manipulating markets for years and this software is just the latest example. A bullet in the back of the head is too good for these parasites.

[Rick Reuben]

That line about 'manipulate markets in unfair ways' is too funny. Sort of like 'they might be able to use tax shelters in unfair ways'. Or, 'they might be able to buy privileged treatment from government in unfair ways.'

Manipulate markets? Oh, that's fine- but just be *fair* about it! I mean, think of the children!!!...

This is extremely perceptive analysis from Cryptogon:

But think about what leveraged trading in real goods does!

Leverage is undead money. It’s zombie money. It can be conjured up and sent out to do the bidding of its master. What happens when infinite zombie money, in the form of leverage, enters markets where finite resources are traded?

Volatility increases and prices distort to the point where the underlying value of a thing gets lost in all the noise. This isn’t a free market; it’s a black magic trick, involving supercomputers, psychological operations and lots and lots of leverage.

[solum]

do i have to read all the words or can you just program the knowledge into my brain?

ps. where are teh puppies?

[bassness]

do i have to read all the words or can you just program the knowledge into my brain?

ps. where are teh puppies?

You can just remain ignorant

[Rick Reuben]

You can make an analogy between the Goldman code and an expert blackjack card counter at the casino, but that's too limited an analogy. Yes, the Goldman code does give them an advantage against the smaller investor the same way a card counter impacts the potential winnings of the other card players as well as the house, but in the case of Goldman, they also are the House, because,as part of the Plunge Protection Team, they are deputized by the Fed and the Treasury tomanipulate the markets- and who would manipulate markets without cutting themselves a bigger slice of the pie?

Beyond that, Goldman also has a mirror behind the other card players/investors and can peer into the strategy and intellectual property of their competitors, through their privileged access to inside info obtained through the regulatory agencies and even spy agencies ..plus, Goldman owns powers of extortion over the government through its major stake in the Federal Reserve, plus, Goldman makes the media work to its advantage.

They make markets. The best leverage, the best insider info, the best extortion racket, the keys to the central bank, plus plants and agents throughout government and the media and even inside their competitors.

This is the market that the idiot sellout liberal traitors who worship the criminal syndicate call a 'free' market. Even now,when they finally feel permitted to criticize the Fed or Goldman because of writers like Taibbi ( after the traitors have been silent for decades,most of them ), the sellout liberals are very very very very careful to describe Goldman as a 'rogue institution' that survives because 'government hasn't been made big enough to control them'... fucking idiots. Their only solution to remedy a Goldman is to feed the beast that the elites already own, the central government.

Goldman is not a 'rogue institution'.

Goldman is EXACTLY what EVERY investment bank wants to be!

Goldman is not a symptom of an unregulated market.

Goldman is EXACTLY the type of bank that ANY market built around speculation, usury and fiat and controlled by America-hating parasites is GUARANTEED to produce!

ENTER

[Rick Reuben]

Extremely interesting ( and totally geeky ) long post on this Aleynikov case over at Daily Kos:

http://www.dailykos.com/storyonly/2009/ ... nt-Trading

Here are the best guesses by the authors about what this software REALLY does...

GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.

Goldman Sachs may just possibly have used security access codes and built a system to acquire trading information PRIOR to transaction_commit time points at NYSE.

The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day.

The authors make the same comparison to a card game that I made:

Access to FIX, OCX or SWIFT messages prior to transaction_commit at the Exchanges would give a player an advantage parallel to seeing an opponent's cards in a game of poker.

Final points of the authors:

Goldman doubled quant market share. Increased profitability of the quant unit so that it was carrying the whole company, couple months back.

Mr. Aleynikov, the charged ??? They want us to think that he was just some doofus, who played with the GS network. A $400,000 a year version of the nerd-spokesperson cell phone guy in television ads. (The bland one who shows up all over the damn place with 5-bar signals and his 1,000-employee network support crew.)

Sure. Trust that.

And Governor Palin is always sober, never dropped a diet pill faux-amphetamine in her life....

BTW: Zero Hedge has careful statistical analysis of what is going on. Bottom line is a 6-sigma proof of distortion. The "why" and "how" of the distortion is what goes outside the NY Times-printed claim that GS developed a super-math engine.

ABTW: Matt Taibbi is another wet-behind-the-ears optimist.

ENTER