If Goldman Sachs' Secret Sauce Is Compromised, What Happens Now?

Oh oh..... Insane major props to Zero Hedge on this one!

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 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 (GS)) 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.

What? Was NYSE/Euronext suddenly "asked" to remove Goldman from the prop trading reports? Or is something else going on, as Zero Hedge and Reuters apparently have managed to scoop:

While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend 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.

Oh, this is bad for Goldman if true. It's even worse for the NYSE, however, as Reuters goes on to explain:

The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms. Goldman was often at the top of the chart -- far ahead of its competitors. It's possible Goldman had asked the NYSE to stop reporting the number after it discovered that someone may have infiltrated the proprietary computer codes it uses.

And yet here's the problem - there's a SEC issue here, in that this most certainly is a material issue related to the firm's prospects and thus under the rules is supposed to be disseminated, at minimum when the request was made to the NYSE to suspend their reporting - if the request was made.

The next obvious question is "who was the firm in Chicago that this guy was going over to work for?"

This is pretty amazing stuff, folks.

Industrial espionage is nothing new, of course. Firms try to "hire away" important employees all the time, and frequently what they want is what's in someone's brain - employment agreement be damned. There is often years of litigation that comes out of this; as can be imagined it's damn hard to own someone's head or the contents thereof, at least in a way you can defend in court. Limited non-competes and such are routinely upheld but often the damage is done by the time the suit is filed.

What's more-clear is when someone makes off with software, a customer list or otherwise clearly identifiable work product that can be traced to its owners. That's blatantly unlawful and yet it can be tremendously profitable - if you get away with it.

What's surprising here is that the FBI got involved so quickly - or at all. These sorts of cases are almost always civil in nature; while there is nearly always a criminal offense embedded in there somewhere (computer tampering, transportation of stolen property, etc.) it is relatively rare for the FBI to give a damn.

Well give a damn they did this time, and the affidavit that Zerohedge has makes clear what they claim they've got this guy cold on - the "bash history" file they're referring to is a Unix system log that the "shell", or command interpreter, automatically keeps. Said alleged offender apparently was aware of this file and tried to erase it after doing his deed, but was unaware that the system he was working on had auditing enabled (oops.)

The bad news for Goldman, though, is that if this code is now in the hands of who knows how many other people, what sort of fun could ensue by knowing how Goldman is analyzing the markets?

This could be kinda fun to watch.... from a distance, of course.

Comments

[TradingHelp...:]

Surely GS is a short? It's got to fall today. Risk appetite is weak following last weeks unemployment data. It would likely fall anyway. Easy money? Or am I dreaming.

Jul 06 07:16 AM

[Free Mind:]

I have just one issue here... Why on earth is this guy uploading such sensitive material from his workplace? He could have saved it on a usb disk and uploaded from wherever else (a cybercafé for instance).

For being a computer wiz, that does not talk favorably of his intelligence. Or is there more to the story than meets the eye?

Jul 06 07:46 AM

[Light House:]

From Lighthouse;
Mike, Your G$, short is probably good for the very short term,but their 2cd, qtr.numbers are going to be phenomenal.If it gets into the 120's again I will be going long for very long.These folks are very organized and talented.If you can't beat them join them. I believe them to be the best for the job for unleveraging and and re liquefying this debt with the least suffering in the long run.There are far to many components to this global crisis and you can't make Econ #101 , the solution. Most of K.Denninger's 25 could and should come true but over time not all at once. I believe we will be just fine in the long run, but it will not be "business as usual". Save, pay down debt,
invest in high Q,5-10 year Corp. bonds,work smart,enjoy family and friends, and don't gamble. Simple, uncomplicated, and hard to do...
lh

On Jul 06 07:16 AM Michael Young wrote:

> Surely GS is a short? It's got to fall today. Risk appetite is weak
> following last weeks unemployment data. It would likely fall anyway.
> Easy money? Or am I dreaming.

Jul 06 08:05 AM

[knowknowbean:]

I've heard about these automated trading boxes from at
least "2 degrees of freedom"

Sure, plug it in and it makes money fly out. Computers can calculate zillions of chess moves to beat humans not surprising "advanced algorithms" play all global markets simultaneously with free bail out money. With a few tweaks it sounds like complete market manipulation.

Jul 06 08:26 AM

[atauber:]

well add this to the story R.S. has on G.S. its getting weird out there.

Jul 06 08:29 AM

[dcb:]

there people belong in jail and on trial for treason after which they shall be imprisoned for life. they have done more damage to the system than osama bin laden ever has and if you start to read the press you can see the little noose is closing.

I hope each and every day they go to work with one eye over their shoulder and live in fear from the misery they have caused millions of American's.

It isn't if you can't beat em join em. It's if you can't beat them destroy them, and after rolling stone and this weeks NY times, along with the comments on CNBC our little army continues to grow. They are the real criminals of this whole drama


On Jul 06 08:05 AM Light House wrote:

> From Lighthouse;
> Mike, Your G$, short is probably good for the very short term,but
> their 2cd, qtr.numbers are going to be phenomenal.If it gets into
> the 120's again I will be going long for very long.These folks are
> very organized and talented.If you can't beat them join them. I believe
> them to be the best for the job for unleveraging and and re liquefying
> this debt with the least suffering in the long run.There are far
> to many components to this global crisis and you can't make Econ
> #101 , the solution. Most of K.Denninger's 25 could and should come
> true but over time not all at once. I believe we will be just fine
> in the long run, but it will not be "business as usual". Save, pay
> down debt,
> invest in high Q,5-10 year Corp. bonds,work smart,enjoy family and
> friends, and don't gamble. Simple, uncomplicated, and hard to do...
>
> lh
>
> On Jul 06 07:16 AM Michael Young wrote:

Jul 06 08:41 AM

[dcb:]

It is hard to imagine the GS aint trading, therefore more sec bending over backwards for GS now that everyone is looking into their trading and what happens to the market. they may be primary drivers of the move down, and just want it hidden because they are trading such huge volumes

Jul 06 08:47 AM

[Neil459:]

More government coverup coming. Can you say "National Interest". Having worked at the Fed the term gets more use than you know. Everyone make copies, because this stuff will probably receive take down notices.

Jul 06 09:36 AM

[swaps:]

Why would astute investors trying to make big killings invest in GS as a long long?
All the obscene money they make goes to the employees and doesn't stay in the company to benefit shareholders at large.
GS ws around 70 in 1999 and is 140 something this morning. It got as high as 250 and naturally dropped because its gains are continually drained away from the shareholders. There was no compounded retained capital - (gains) in this shell to weather the general collapse.


I just tried to copy the GS chart but it did not take. Sorry.

Jul 06 09:53 AM

[Moon Kil Woong:]

Umm when you are such a large portion of the market it's not too hard to get a good and constant trading advantage. To this point it doesn't take a genius and is hard to copy. Even if code was stolen they would have a big advantage.

Regarding this becoming an issue of national security. Isn't it an issue of failure to disclose material facts to shareholders when the biggest component of your profits is stolen for over a month and you don't say anything? Actually this sounds more like a cover up than some vast financial conspiracy to threaten the national security of the US. In fact, if Goldman Sacs just went away it would probably help make the financial industry more moral and solve a boatload of conflicts of interest. Perhaps even a lot of those pesky derivatives they toy around with could get cleared out of the system. Oh sorry, I shouldn't talk about it. That is also confidential. That's why they are allowed top keep them off book and not tell their shareholders what they have and what they are doing. You'd thing GS was a branch of the government. Who knows, maybe they are...

Jul 06 10:37 AM

[Jason Rines...:]

I work in the data business. Auditing programs or not the employees always feel smarter then there employer and attempt to steal the data and sell it, or steal the data and start there own business. It what makes being in this space tricky and frustrating. On top of that is an attitude from labor that they are 'owed' a living. That somehow, theft is justified. Much will change in the coming years in our society. But none of it will change without a dramatic change in leadership.


On Jul 06 07:46 AM Free Mind wrote:

> I have just one issue here... Why on earth is this guy uploading
> such sensitive material from his workplace? He could have saved it
> on a usb disk and uploaded from wherever else (a cybercafé for instance).
>
>
> For being a computer wiz, that does not talk favorably of his intelligence.
> Or is there more to the story than meets the eye?

Jul 06 11:26 AM

[White Shield:]

This is an epic event - regardless of guilt or reason, we can now all see "the (naked) king's p-p"!

Let us now see who runs to re-robe him!

"Do not participate in the deeds of darkness, but rather expose them."

Jul 06 02:20 PM

[White Shield:]

On Jul 06 07:46 AM Free Mind wrote:

> I have just one issue here... Why on earth is this guy uploading
> such sensitive material from his workplace? He could have saved it
> on a usb disk and uploaded from wherever else (a cybercafé for instance).
>
>
> For being a computer wiz, that does not talk favorably of his intelligence.
> Or is there more to the story than meets the eye?

"Divine intervention"? A "Black Swan" moment? Both?

Jul 06 02:22 PM

[Thomas J. G...:]

Karl's statements are fine but the news quotes he quotes are confusing. My reading is that this programmer was taking proprietary source code (computer language that makes the application work) and maybe going to a competititor. But the article talks about codes like passwors or some kind of access mechanism which is completely different.

Jul 06 02:24 PM

[johnny doe:]

If GS was not so over leveraged in its huge derivative position this might not be such a problem .
BUT ! (a very big but) it has the worst overleveraging in the banking industry .

Jul 06 02:52 PM

[mrpitchfork:]

yeah, but its all based on a fiat monetary system that's going to crash to earth one day..


On Jul 06 08:05 AM Light House wrote:

> From Lighthouse;
> Mike, Your G$, short is probably good for the very short term,but
> their 2cd, qtr.numbers are going to be phenomenal.If it gets into
> the 120's again I will be going long for very long.These folks are
> very organized and talented.If you can't beat them join them. I believe
> them to be the best for the job for unleveraging and and re liquefying
> this debt with the least suffering in the long run.There are far
> to many components to this global crisis and you can't make Econ
> #101 , the solution. Most of K.Denninger's 25 could and should come
> true but over time not all at once. I believe we will be just fine
> in the long run, but it will not be "business as usual". Save, pay
> down debt,
> invest in high Q,5-10 year Corp. bonds,work smart,enjoy family and
> friends, and don't gamble. Simple, uncomplicated, and hard to do...
>
> lh
>
> On Jul 06 07:16 AM Michael Young wrote:

Jul 06 03:57 PM

[Ryu Mei Co:]

Is this a "Black Swan" event?

I like to have that secret program and understand how it works for educational purposes. It will not be profitable using the program anymore and I am pretty sure the program is already becoming obsolete once it is leaked...........

Jul 06 08:29 PM

[spontsymm:]

It's not the program by itself (lots of firms have algo trading programs), It's being in the front of the line of all the ticker data. It's the privledged position to the data stream that lets them siphon off the trend wave for profit. If you sit at the center of the exchange (largest node of the network), is it any wonder you would have a natural advantage, or oops, a cash machine sitting in your lap? Didn't anyone here see the movie PI?


On Jul 06 08:29 PM Ryu Mei Co wrote:

> Is this a "Black Swan" event?
>
> I like to have that secret program and understand how it works for
> educational purposes. It will not be profitable using the program
> anymore and I am pretty sure the program is already becoming obsolete
> once it is leaked...........

Jul 06 09:42 PM

[Rob_W_:]

Sanctuary or equivalent immediately comes to mind.


On Jul 06 07:46 AM Free Mind wrote:

> I have just one issue here... Why on earth is this guy uploading
> such sensitive material from his workplace? He could have saved it
> on a usb disk and uploaded from wherever else (a cybercafé for instance).
>
>
> For being a computer wiz, that does not talk favorably of his intelligence.
> Or is there more to the story than meets the eye?

Jul 06 09:56 PM

[spontsymm:]

I guess now maybe we will see if it really is the FED and GS holding down the price of gold with automated and spider webbed short positions?

Jul 06 09:58 PM

[Marvin Clark:]

Karl, great article. I posted this link on Twitter and with your kind permission I would love to post the article with full credit on my blog.

Jul 07 12:25 AM

[odin:]

Most banks have tweaked the OS to disable USB access. You cant plug in a USB HD to copy data.


On Jul 06 07:46 AM Free Mind wrote:

> I have just one issue here... Why on earth is this guy uploading
> such sensitive material from his workplace? He could have saved it
> on a usb disk and uploaded from wherever else (a cybercafé for instance).
>
>
> For being a computer wiz, that does not talk favorably of his intelligence.
> Or is there more to the story than meets the eye?

Jul 07 02:19 AM

[Ransome:]

"The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year"

What happened to investing in companies by buying stock?

“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,”

Says it all.

Jul 07 10:26 AM

[MarkitWacha:]

There are a couple of prop trading firms in Chicago that could use a high-freq desk, but the only firm that would pay New York wages would be Citadel. They have hundreds of programmers.

This guy was an idiot to copy something this sensitive overseas.

Jul 07 03:40 PM

[H. T. Love:]

Presuming that such a large outfit has competent security administrators, any unit with access to sensitive information will not have a usb port. A pair of side-cutters ("dykes" for you other old-timers out there) is all it takes.

Disabling in the BIOS is insufficient (even if BIOS is password enabled, password can be discovered and BIOS can be reset to factory default - no password). Disabling in the kernel is likewise insufficient as the kernel can be rebuilt and/or replaced. One can't assume that users are incapable of such activity.

Likewise, certain internet access will be limited by the corporate firewall and other access will be monitored and reported.

Regardless of that, there is *always* some personnel that must have more open access and all you can do is monitor and report on those folks.

Trust always has to reside somewhere, even if it's only in the security administrator.

Even with selinix, acl (access control list), etc. you can't lock things down so tight that folks can't do their job. Security is somewhat of an art, as well as a discipline, because there are *always* trade-offs.

HardToLove


On Jul 06 07:46 AM Free Mind wrote:

> I have just one issue here... Why on earth is this guy uploading
> such sensitive material from his workplace? He could have saved it
> on a usb disk and uploaded from wherever else (a cybercafé for instance).
>
>
> For being a computer wiz, that does not talk favorably of his intelligence.
> Or is there more to the story than meets the eye?

Jul 08 05:26 AM

[kookaracha:]

Doh!..Just wondering if the "super computer" that Goldman was using was an Amiga computer?

Jul 08 10:30 AM