Is a Case of Quant Trading Sabotage About to Destroy Goldman Sachs? 64 comments
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Major developing story: Matt Goldstein over at Reuters may have just broken a story that could spell doom for if not the entire Goldman Sachs program trading group, then at least those who deal with "low latency (microseconds) event-driven market data processing, strategy, and order submissions." Visions of swirling, gray storm clouds over Goldman's SLP and hi-fi traders begin to form.
Back-up: 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 has kept tabs on this data, and a datapoint 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 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
Even more odd, this "disappearance" comes hot on the heels of what Zero Hedge reported could be potentially a major change to the way the NYSE provides its weekly program trading report. Of course, Ray over at the NYSE immediately replied to Zero Hedge that all was going to be same as always ... Odd, maybe he meant that all is back to normal except the reporting of Goldman's trades. Either way, it might very well be time for proactive readers to again contact the two employees publicly disclosed by the NYSE as lead-contacts on the issue. Readers will recall that it was these same two who were previously steadfastly assuring anyone who would listen that there would be no change at all in data reporting.
Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 or
Aleksandra Radakovic, Vice President, NYSE Regulation at (212) 656-4144
Alas, the just released weekly data proves that either theirs was a material misrepresentation of facts, or Goldman simply suddenly decided to stop transacting with the NYSE, or, what would be even more sinister, Goldman notified the NYSE to scrap all their trading data from the prior week. Why would they do that?
Going back to Matt Goldstein's story. In a nutshell, on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy over at 85 Broad (or maybe 1 New York Plaza, his detailed Bloomberg Bio page has disappeared) and had the following responsibilities at Goldman Sachs according to Linked-In:
• Lead development of a distributed real-time co-located high-frequency trading [HFT] platform.The main objective was to engineer a very low latency (microseconds) event-driven market data processing, strategy, and order submission engine. The system was obtaining multicast market data from Nasdaq, Arca/NYSE, CME and running trading algorithms with low latency requirements responsive to changes in market conditions.
• Implemented a real-time monitoring solution for the distributed trading system using a combination of technologies (SNMP, Erlang/OTP, boost, ACE, TibcoRV, real-time distributed replicated database, etc) to monitor load and health of trading processes in the mother-ship and co-located sites so that trading decisions can be prioritized based on congestion and queuing delays.
• Responsible for development of real-time market feed handlers, order processing engines and trading tools at a Quantitative Equity Trading revenue-making HFT desk.
If the allegations are true, it looks like Goldman's hi-fi quant trading desk was thoroughly penetrated by a "spy", and as readers will recall, Serge[y]'s description of his job duties mirrors what Mr. Ed Canaday conveniently provided to Zero Hedge as a description of Goldman's SLP program. (Sources connected with the office of the United States Attorney have confirmed to Zero Hedge that Aleynikov was at one time or another a Goldman employee.).
The plot thickens: per FBI agent Michael McSwain's sworn deposition, Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Matt reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary (Hey Getco, is it time for a formal release at least denying you guys had anything to do with this, cause if you did it might not look that hot. No matter, we have reached out to our sources in law enforcement to confirm or deny Getco's, and Goldman's, involvement: once we get a response we will immediately advise our readers).
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.
What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.
Now the real question here is, does [GS?] feel lucky? Because the code has supposedly been in the hands of an outsider for over a month, one might suspect that anyone who wanted to has had ample opportunity - if the holder(s) wished to sell... Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks: after all, it is the very Goldman Sachs (which may or may not be the target of this program trading industrial espionage) which is the primary SLP on the world's biggest stock exchange.
Another major question: do Goldman and the NYSE not have a fiduciary responsibility to announce to both shareholders and any interested parties if there has been a major security breach in their trading operations? Certainly this seems like a material piece of information: given that program trading accounted for 49% of all NYSE trading last week, and Goldman as recently as one week ago represented about 60% of all principal program trading, will this be called an issue threatening the National Security of the United States. Shouldn't all market participants be aware that there is some rogue code in cyberspace that can be abused by the highest bidder, who very likely will not be interested in proving the efficient market hypothesis? What will happen when said bidder goes about trying to front run none other than the "Financial Institution" [GS]?
The complete affidavit can be downloaded from this post here, and is also provided Scribed below as this could (and likely should) become a matter of National Security. Zero Hedge will closely monitor this situation from the European hinterland and provide updates as they come. For really interested readers, we recommend tracking any potentially new developments on the forums and message boards over at Wilmott.
Lastly, a quick question to lawyers among our readers: what if any is the likelihood that Goldman will be forced to provide associated discovery if this were to become an extended legal case?
Major hat tip Matt Goldstein of Reuters
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This article has 64 comments:
Well done Tyler. You are truly the 'Batman' of Wall Street.
There is obviously something very strange going on. An industrial spy penetrating the prop desk of GS. Incredible. I wonder if GS can escape and re-use its strategy or if it is forever corrupted and lost.
To what degree will this hit GS earnings, if it is lost? What percentage of their earnings comes from the prop desk in question? If there are analysts with a in-depth knowledge of the GS P&L I would very much appreciate guidance.
Bravo, Tyler.
would this have an effect on the overall market?
What shows if they are shorting?
Very interesting stuff
It looks like all of their competitors have rapidly increased their trading volumes. The only glaring difference that I can see is that Goldman has simply dropped from the list.
Something smells fishy in Denmark. Thanks for bringing this to light.
Short Goldman?
I am long on GS preferred D (as an inflation hedge).
If I read this right, someone now has posession of a program that is half "Office Space" where they skim fractions of pennies from a massive number of transactions, and half the "Sting", where they know the winners of the horse races before they are released to the public.
My best guess is it's a massive front-running scheme, which doesn't have to be illegal if done with publicly available data.
I'll head over to Reuters and give Matt a +1 also.
One can imagine that this story will be spun like crazy by GS and the FBI.
suffer.
We're talking billions and billions of dollars here, so I take nothing off the table at this point.
SHTF Mac
BTW can't we subtract 49% of the market and the other participants and get GS' volume? Unless they hide other traders as well subtraction should do the trick.
Some Russian IT genius steals the top secret computer code from the all powerful and deep pocketed Goldman Sachs. A system that puts together a whole lot of information designed to front run the market and arbitrage the market over and over again for low risk trades that create big profits. The man and his briefcase are seized at the Newark airport but Goldman's has mysteriously changed their behavior for the time being.
Why isn't the media reporting more about this?
Where is James Bond?
Who are really the bad guys?
"A Russian Spy is being tracked down by a group of Porsche driving bankers, wearing Armanni suits, who are trying to locate the stolen top secret trading code that is worth billions to an evil genius on the black market.
The bankers have 48 hours to find the Russian Spy, or be sacked, stripped of their suits and forced to flog their Porsches on Ebay.
Faced with the indignity of shopping for clothes at Walmart and buying a car from General Motors, the bankers simply MUST find the Russian."
Coming soon to a movie theater near You!
GoldmanSachs = Criminal, low-life, $hitstained, American thief.
Those two are made for each other.
Now, let us all hope fervently that Serge has done something to the Goldman machine that will make the wheels fall off that motherf'ker.
TGFD
In other words, GS prog trading orders don't go through the internet to reach the exchanges, but rather just one ethernet router away.
The physical proximity has to be a critical factor to achieving such extreme low-latency.
Is this legal? Does it raise any questions of unfair access or anti-competitive behavior? I don't know. But these could be interesting questions.
However, GS will cover this up somehow. I'm sure they'll find a way to hold the trial in secret and then permanently seal the court records.
Also, I wonder how they got the FBI to move so quickly. Didn't think Muller was on their payroll.
Of course, as mentioned above, the culprit would have to have equal access to fresh trading information. Aint that inneresting.
I am outraged!
On Jul 06 02:20 PM Bo Peng wrote:
> "Co-located", with what? Must be the exchange order execution servers.
> Otherwise network latency alone could easily put you beyond the microsecond
> timescale.
>
> In other words, GS prog trading orders don't go through the internet
> to reach the exchanges, but rather just one ethernet router away.
>
>
> The physical proximity has to be a critical factor to achieving such
> extreme low-latency.
>
> Is this legal? Does it raise any questions of unfair access or anti-competitive
> behavior? I don't know. But these could be interesting questions.
On Jul 06 02:20 PM Bo Peng wrote:
> "Co-located", with what? Must be the exchange order execution servers.
> Otherwise network latency alone could easily put you beyond the microsecond
> timescale.
>
> In other words, GS prog trading orders don't go through the internet
> to reach the exchanges, but rather just one ethernet router away.
>
>
> The physical proximity has to be a critical factor to achieving such
> extreme low-latency.
>
> Is this legal? Does it raise any questions of unfair access or anti-competitive
> behavior? I don't know. But these could be interesting questions.
And even if you could the deep pocket guys are going to have the fast systems to react to the data before everyone else. So it is futile to try to regulate this.
What may be possible is some sort of order processing lag that makes these microsecond advantage useless.
On Jul 06 04:51 PM wheelbarrelsofcash wrote:
> If they have access to NYSE data before anyone else I would have
> a hard time accepting that as being legal, even if it is only a millisecond
>
Everything is a trade secret until its not a secret anymore.
The problem all along can be realized by the "sand-pile" model of self-organization. Under this model, when dropping sand into a pile, as long as the small "local" avalanches are allowed, the pile will grow endlessly. However, if small avalanches are prevented (i.e., through stimulus bailouts or programmed trading), then there will occur very large global avalanches. A free market allows the natural losers to drop off line, so that the entire market can grow.
BTW, the code was probably previously stolen and this news is merely a public front.
Aside from that, do please get a life.
First, the Govt will bail it out with Billions
Second--The bailout(s) will not be accounted for.
Third--The Rats, Scoundrels and Roaches at GS will flee and end up working at the Fed, Treasury and advising the Pres.
History repeats itself.
On Jul 06 09:15 AM yellowhoard wrote:
> I had to read that twice.
>
> If I read this right, someone now has posession of a program that
> is half "Office Space" where they skim fractions of pennies from
> a massive number of transactions, and half the "Sting", where they
> know the winners of the horse races before they are released to the
> public.
On the other hand, sometimes technology, without the right technologist to implement it, becomes much harder to leverage. During the Cold War, the KGB and Stasi often reported that they were successfully able to gather information from the West, better than any other spy agency on the planet. These intelligence gathering programs were extremely elaborate and sophisticated.
However, the problem was it took the scientists and engineers back in Russia 5-10 years to be able to reverse engineer the technology or designs that were captured. By that time, the US designs were already another generation ahead of where they were when the blueprints were originally captured, making them obsolete. So getting the guy is just as important as tracing where the code went.
Sergey claims he is innocent and was just trying to download some open source tools from the German web server, but you don't throw around proprietary code like that offsite without knowing the difference between commonly reused open source libraries and proprietary company code - it's pretty hard to mix the two up.
Perhaps he wanted to reuse some of the routines he had developed at Goldman, but in any case, he should have known that even though he may have created the code, it's Goldman's property, not his. Best case scenario - he is a naive (not sure how you could be getting $400K per year as a coder) employee, worst case - he is the front man for an even more developed network of cyber thieves. There is a precedent for this type of network with Abdul Qadeer Khan, the Pakistani engineer who supplied an underground network with nuclear secrets for years.
If Sergey Aleynikov is really the sole actor in this case, alot of the damage could be contained. However, I would hope he is not a front man for a support network that provides the muscle to be able to use this code, and even worse, that the code has been passed into this network and is already making its way through the system.
Last year, Attorney General Michael Mukasey reported that organized crime had penetrated international energy markets, and were on their way to even more widespread market manipulation. This type of crime is extremely serious, as it not only has the ability to destabilize our financial markets, it also has the ability to compromise our national security.
www.cnn.com/2008/CRIME...
American financial markets and information technology networks are considered soft targets, and their protection is something we should take with the same seriousness as a physical terrorist attack.
Witness Estonia, in 2007, where cyber attacks took place to the point of shutting down banks:
www.nytimes.com/2007/0...
This type of threat is extremely serious and hopefully the FBI is able to stay on top of it.
On Jul 06 07:47 PM Loucleve wrote:
> Use your head Durden. If the program generates trades, regardless
> of whose possession its in, GS will know. Follow the foot prints.
> Anyone with enough capital to impact the market will be flushed out
> pronto.
>
> Aside from that, do please get a life.
Русские везде пролезут, но их все-таки берут за жопу...
On Jul 06 08:52 AM BPYHO wrote:
> Glad this happened, I view GS as the devil. i konechno, vor bil Russki!
> hahahaha
There is a small chance that a "spy" has anything to do with theft of the code. Most good coders probably wouldn't be interested in the code, since they would know there's an electronic leash on it. It's also very unlikely that it involves revolutionary breakthroughs in numerical methods better than what's already publicly in e.g. LAPACK or EISPACK, available at www.netlib.org/liblist.... There are Russian versions of LAPACK and EISPACK at alglib.net for C#, C++, DELPHI, VB.NET, so most of the good stuff is freely available. It is also doubtful that GS developed software for true random number generation (RNG), instead of pseudo-RNG, which renders encrypted data easier to decipher. (NSA supposedly has something close, but no one on the outside will ever know). Besides, who needs true RNG when you can get something close from TrueCrypt? Code developed by e.g. the Prediction Company (predict.com) would probably be more interesting than software developed by GS.
Someone in IT at GS made the most galactically-stupid mistake by not firewalling the software from download or copying. Even then, security is a myth, it's not a reality. Anyone in their right mind who made 400k per annum would have a severance package equal to at least 2 years worth of salary plus bonuses, altogether 1.2-1.5m. They could also easily become CEO, COO, or CIO of a top 500 company in several months after termination. Something sounds fishy in all the information presented.
a little help from his friends, the faithful SA bloggers. Thanks to all, especially Tyler and please keep hope alive by telling it like it is.
he he: McSwain
comes this piece of religious crapola phrasing
Wherefore, deponent
PRAYS
that Sergey Aleynikov, the defendant, be imprisoned or bailed,
as the case may be.
Michael McSwain ,
Special Agent
/You can't make up CRAP like that....
Certainly the energy is present for a move to a new quanta in the state of political economy, can't imagine it'll be pretty. Prepare for the worst- sod the financial markets, we need an applicable, global, humanistic charter of legal protection for all citizenry -to let the extremely valuable entities battle this out without trampling on the rest's 20% (will settle for 3M, meek like that).
etter to white house, senate and house banking committee's
This is from the financial times 7/6/09. Front page. "Banks reinvent securitisation..."
Goldman is working on a scheme that would reduce the capital held against the assets.
"Goldman's idea, it would sell an insurance product to a bank with a toxic portfolio". "the insurance would require far less capital to be carried against it than the original assets.
Isn't this what got us into this whole mess in the first place. American's want real solutions not a set up for this to happen again and the bankers to collect billions ruining the economy once more. This sounds a lot like AIG. Haven't their misdeeds cost us enough. We'd rather wait for a real recovery that have to do this again anytime soon. Please stop the bankers from ruining anymore lives.
"Of course, as mentioned above, the culprit would have to have equal access to fresh trading information."
...one should recall,
"[Sergey] then proceeded to encrypt and upload to a website in Germany, with a UK owner."
Holy Big Momma Slimy Lymie, Batman!
Memories of the role the London office of AIG played in turning that company into a zombie quickly come to mind. Not exactly what you might call the work of a friend of Justice and Liberty.
Yet, too, closing remarks by @Leif Peterson (7/6 7:37 PM) also deserve consideration...
"BTW, the code was probably previously stolen and this news is merely a public front."
Which is to say all things might not be what they seem. A most reasonable possibility in a day and age when a bunch of cave dwelling, monkey bar climbing, dog gassing fleas can pull off a military-style operation against a nation that spends trillions on its defense and intelligence.
I suspect the guy just wanted to use the code, or at least the algorithms, to impress his new bosses. He's full of crap when he says he only wanted the "public" part, of course... he was flat out trying to steal it.
The really mysterious thing is GS dropping off that trading report. Hard to believe it's a coincidence!
On Jul 07 03:09 AM venture exchange wrote:
> From the last paragraph of the irish fbi agent's affidavit
> he he: McSwain
> comes this piece of religious crapola phrasing
>
> Wherefore, deponent
> PRAYS
> that Sergey Aleynikov, the defendant, be imprisoned or bailed,<br/>as
> the case may be.
>
> Michael McSwain ,
> Special Agent
>
> /You can't make up CRAP like that....
----------------------...
That's a lot of code. Games are large, because graphics are large. There are no graphics in source . . .
Without graphics, 32 megabytes is (very roughly) 3-500,000 lines of source code. That's more than enough for trading algorithms.
Rollingstone.com
The Great American Bubble Machine
Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression
MATT TAIBBI
Posted Jul 02, 2009 8:38 AM
In Rolling Stone Issue 1082-83, Matt Taibbi takes on "the Wall Street Bubble Mafia" — investment bank Goldman Sachs
Just coincidence"?" Anyone for more details should read Matt Taibbi's current article in RollingStone Magazine.
"simplicity is a necessary precondition for reliability" - Dijkstra, Hoare, etc.
One would be more concerned were it larger. Vista, anyone?