Goldman Sachs: Thoughts on the Developing Stolen Trade Secrets Scandal

Consider, the story about Goldman Sachs (GS) and the theft of its trade secrets last week. Bloomberg reported the following just this week on this breaking story:

Sergey Aleynikov, an ex-Goldman Sachs computer programmer, was arrested July 3 after arriving at Liberty International Airport in Newark, New Jersey, U.S. officials said. Aleynikov, 39, who has dual American and Russian citizenship, is charged in a criminal complaint with stealing the trading software. 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 (emphasis mine), according to a recording of the hearing made public today. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.” 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.

It’s curious to note that Goldman Sachs has admitted that it has developed trading software that could be used to, in their own words, “manipulate markets in unfair ways”, yet nobody in the mainstream media has questioned whether Goldman Sachs was / and is using its proprietary trading platform to manipulate markets in unfair ways. Only extremely naive investors with zero understanding of how global stock markets operate would deny that there has been continual and excessive intervention into US stock markets to prop them up over the past several months.

The announced breach of Goldman Sach’s trade secrets coincided with an inexplicable omission of Goldman Sachs from the NYSE’s weekly report of the most active trading programs for the week ending June 26, 2009, though on Monday, July 6, 2009, a NYSE spokesman explained to Reuters that “the exchange was to blame for Goldman missing from the list, adding the bank reported its data to the exchange correctly and on time.” Even if this fishy explanation regarding the omission of Goldman Sachs’s trading activity from this weekly report is true, Goldman Sachs in light of this recent development, has undoubtedly had to proceed much more cautiously with their trading activities given that there may be unknown persons out there privy to their every move right now.

What is highly curious, in my mind, is the fact that oil plunged 10.5% from a high of $71.60 to a low of $64.05 in just the last four trading days and the fact that US stock markets plummeted on July 2nd, before a major US holiday weekend, at a time when Goldman Sachs has most likely not been participating in markets at their regular activity level given these recent developments. Typically before a major US holiday, trading volume on US markets is very light. During the recent rally in US markets from early March to early June, unidentified institutions have taken advantage of very low trading volumes to prop up US markets whereas higher than normal trading volumes often resulted in an aberration of a heavy down day. I fully expected July 2nd, due to the low trading activity that normally accompanies a pre-holiday market, to be a day when US markets would be propped up, yet July 2nd was a very heavy down day in US markets.

Secondly, every trader rcognizes the importance of Goldman Sachs’s activity in crude oil markets. In fact, if Goldman Sachs makes significant changes to the weightings of its GSCI (Goldman Sachs Commodity Index) components, virtually every commodity fund manager in America accordingly changes the weightings of his or her portfolio to mirror the changed weightings of the GSCI. I haven’t researched how many times in recent history the price of oil has plunged 10.5% in four trading days, but I’m guessing not too often.

Could stock and select commodity markets actually have been driven more by the free market forces of supply and demand than by market manipulation and by free-market intervention schemes for several days while “the invisible hand” of Goldman Sachs has been temporarily tied behind its back? Just a thought.

Disclosure: No positions

Comments

[luv2makemonies:]

HOLY COW! this news had a "let the cat out of the bag" effect, Goldman Sach just admitted that they have this super duper trading software to manipulate and perhaps beat the market... No wonder us small fries just can't win these days. This story would also make a great screen play for a movie and I could see Tom Cruise as the Star playing the good guy vs big bad evil Wall Street Firm Goldman Sucks ;-)

Jul 07 04:05 AM

[btimsah:]

I am amazed that nobody in the mainstream media has figured this story out. They still view the story as a problem for Goldman Sachs, because someone stole their code. This is MUCH more than that, and for the reason's you have mentioned here. Thanks!

Jul 07 04:10 AM

[Davewmart:]

The case for a Rico investigation of GS is unanswerable in my opinion.
Except they own the casino.

Jul 07 05:05 AM

[Moon Kil Woong:]

"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" the same way it uses it every day. I personallly would like to see the code. I'm sure it would go a long way in explaining how GS gets market advantages that other traders don't get.

Most likely it involves 1) seeing the volume of its own trades before orders are actually placed 2) taking advantage of its high volume to push around prices and punish those going against it 3) working with others to squeeze out small players when markets get illiquid 4) and take advantage of less fortunate market participants who can't act in under 1 second when trading. Or you can put it another way:

Basically, the code is probably very good at helping GS use its trading platform to bully around everyone in markets it dominates. Whether it is technically illegal I don't think GS really cares about unless it gets out in the open (ergo the national security cloak). Whether the NYSE or others should prevent one company from dominating any form of trading or even dare to prevent such trading via antitrust is a question they should have considered long before such a scandal raised so many people's heads.

Right or wrong, conspiracy or not, bringing attention to what GS is doing is something that should have been be looked into long time ago. Personally, I think this attention on their proprietary trading methods is good.

Jul 07 05:17 AM

[sheeple123jump:]

..so then,wouldnt it be a smart idea for savvy traders to study all markets for this precious 4 day window of data...analyzing it to get a better sense of true market sentiment...in whatever way that tells any unexpected clues....

Jul 07 05:23 AM

[John McLeod:]

Nice catch. To be fair it was the assistant DA who spilled the beans about the SW enabling unfair manipulation. Heaven knows where they got that idea. Prosecutors don't get to make stuff like that up, do they?

Jul 07 06:46 AM

[Marrigan:]

Kudos for pointing out that the emperor has no clothes. GS is blowing smoke in a transparent effort to make Aleynikov unemployable and the reporting of this case is shameful. Bloomberg regurgitates every breathless hyperbole-laden charge from GS and the prosecutor, including the absurd idea that GS can claim imaginary losses from future trades. Unfortunately, Aleynikov's dual citizenship is a challenge for his defense atty, but that's the whole point, eh? Here's hoping that more people will draw on their reasoned analysis to see how GS continues to use their money, power and influence for unfair advantage. Perhaps congressional hearings can shed more light on this...or not.

Jul 07 07:32 AM

[John Galt:]

"It’s curious to note that Goldman Sachs has admitted that it has developed trading software that could be used to, in their own words, “manipulate markets in unfair ways”, yet nobody in the mainstream media has questioned whether Goldman Sachs was / and is using its proprietary trading platform to manipulate markets in unfair ways"

THAT says it all right there!

Jul 07 08:27 AM

[Ryu Mei Co:]

Someone has been naughty, naughty!

Well, there is no way to short or long on oil with GS behind every moves. And, OPEC should thank GS for it.

Jul 07 08:53 AM

[SisyphusStone:]

As Zerohedge pointed out, it is uncanny (not) the speed and alacrity with which the FBI have pursued this 'supposed' larceny.

More proof - as if it were needed - that the tail wags the dog.

.... oh, anyone seen a 'fall-guy' hanging about of late???

Jul 07 09:35 AM

[ain't no fo...:]

Zero Hedge has been all over this thing too, and I'd expect more from the Reuters reporter who broke the story originally.

Incredible stupidity for GS to allow the world to know that the code is basically a manipulation machine wired directly into the NYSE computers right in the back rooms of the Exchange, giving them a millisecond advantage to front-run the market. Evidently, the issue is "fairness"... if GS manipulates markets with the "tool", it is FAIR. If others manipulate the markets with GS's tool, it is UNFAIR.

There is a related and important story here as well - Goldman has entered into an unholy alliance with the NYSE to be its SLP (Supplemental Liquidity Provider) - virtually a monopoly the way GS and the NYSE excluded other liquidity providers such as NASDAQ from participating in the program. Not a surprise of course. Its just business, GS style.

Evidently GS liquidity is GOOD, but everybody else's liquidity is BAD.

zerohedge.blogspot.com...

Goldman is the most powerful "publicly owned" financial institution on the planet. That in itself would be OK, since that is supposedly what US capitalism is all about, or at least what it was about at some point in our recent past. But the manner and extent to which Goldman has infiltrated all of the key governmental, regulatory and institutional infrastructure of this country's financial affairs IS NOT OK, and the degree to which it controls this infrastructure invites manipulation, lack of transparency, restriction of liquidity, and it imperils the security of our "free and open" markets. Goldman is joined at the hip to the NYSE in such an incestuous manner that it prevents competition. It owns large pieces of Treasury, the Federal Reserve, and many other critical economic organs of government. It does its damndest to stomp out competition in any market it enters, and it has enough people in places of power to grease the process.

Goldman as it sits today in its position of power and influence, remaining totally beyond the reach of regulation, oversight or common sense, is a danger to free markets everywhere.

Jul 07 10:21 AM

[youngman442002:]

Goldman Sachs owns the government...thats all...turn out the lights

Jul 07 10:27 AM

[swaps:]

I hope this secret software falls into the hands of JEF, where I have a position.

Jul 07 11:15 AM

[Gtarras:]

Hopefully, we will be hearing more on how this story develops...

Jul 07 12:00 PM

[John Lounsbury:]

GS: "Oops!"

Jul 07 12:24 PM

[Peter Iwano...:]

I agree that the main issue should be focused towards GS. If someone else were to use this software to "manipulate the market" it would have to be an entity with the size and resources to do it.

While I think it's fine for GS to be the size it is, to void free-market principles because of it is not right.

Great article.

Jul 07 12:38 PM

[iyamwutiam:]

How much news and corraoration and FACTS do you need that the 'market' is a giant vacuum cleaner sucking the back BACK from the middle calss to the elites.

I am now out of the market period.

Jul 07 01:17 PM

[Graham and ...:]

When Goldman Sachs manipulates the markets, it's "fair." Otherwise it is unfair.

Jul 07 02:27 PM

[Jason Rines...:]

There is no honor amoungst theives. This reminds me of a mexican stand-off where the thugs just start shooting each other over the last of the remaining spoils. The bigger battle however is for the international reserve currency peg prize, East vs. West. The United States is hanging itself on the rope as Karl Marx predicted. The time for a 180 in honest dealing in Washington has come and gone. The US will lose the peg and when it does, inflation of yesterday will seem like a good dream. As an American, this stings and all we can do is attempt to educate the public and conduct political change, with 2012 being a pivotal year. We're all going to be great little communists or throw off the yoke.

Jul 07 03:56 PM

[mikesa69:]

So how about any of you who have an account with them pulling your funds and putting them into a nice regional bank? But I suppose that would only be a solution for someone who would let their morals interfere with their willingness to make some coin. Any mild condemnation aside, I admit it's difficult to submit to morality when there's a good trade available.

Really, though, it'd be very interesting to see what happened if Americans et al pulled their funds en masse from C, BAC, GS, etc.
Any bets on whether that'd finally give all the TARP babies something to really cry about? Or, would these 'too big to...', no wait, 'already failed' banks just find clever accounting tricks to obfuscate all the dough flying out their doors?

I'd like to know who originally mentioned the ability of the SW to be used for unfair manipulation; was Facciponti just regurgitating a sloppy GS slip of the tongue, or was he applying some creative license? And isn't 'unfair manipulation' redundant anyway?

Jul 07 04:19 PM

[BRUCE E. W.:]

URL: www.rollingstone.com/p... by Matt Taibbi
Read the excerpt: go get the full article in July's RollingStone Magazine. Perhaps some thefts actually cover some tracks. Oh what tangled webs we weave, when first we practice to deceive...or was that "receive?"....

Jul 07 07:40 PM

[Mill Rat:]

I have forwarded this article and a few by "Tyler Durden" to one of the Senators representing my state (Robert Casey of Pennsylvania). Those of you who can vote in the United States should also contact your respective Senators and Representatives about this matter.

Bryan

Jul 07 09:03 PM

[JeffDB:]

On Jul 07 07:40 PM BRUCE E. W. wrote:

> URL: www.rollingstone.com/p...
> by Matt Taibbi
> Read the excerpt: go get the full article in July's RollingStone
> Magazine. Perhaps some thefts actually cover some tracks. Oh what
> tangled webs we weave, when first we practice to deceive...or was
> that "receive?"....

You can also get the full article here, albeit in rather poor pdf quality:

www.box.net/shared/lls...

See also Matt Taibbi's blog responding to GS's response to his article: trueslant.com/matttaib.../

Jul 08 12:40 AM

[ex- bond tr...:]

Extemely intelligent article J.S. In fact all of your writings are.
Here's some food for thought, was heavy downside volume July 2nd a result of an absent GS or was it the revenge of the Rothschilds, the ongoing Smith vs. Jones power dominance feud
between these two elite banking cartels. Or were they and are they in collusion?

Jul 08 04:17 AM

[Ray Winter:]

What a great guy Mr. Sergey Aleynikov is as he has brought the underhand operations of a big financial institution acting against the small investor into the public domain and protected himself by sending a copy of their software to a secure space in safe country.

It seems he has an excellent defence.

Jul 09 09:41 AM

[jai hanuman:]

the DA wants a job at Goldman.

Then after a couple of years he'll resurface as the Attorney General of the US.

Then after a couple of years he'll be back at Goldman....

Then after a couple of years he'll be back in Washington....

Then after.... you get the idea.

Jul 11 07:00 PM

[Bobhjon:]

At one time, banks were only permitted to invest in AAA- and US Treasury- bonds. Now Goldman and some other large banks get a large percentage of their profits from Trading ... a speculative activity.
Why are banks permitted to risk their depositor's and taxpayer's money in speculative activities?

In every trade, someone wins and someone loses. Since Goldman usually wins in its trades, guess who loses ... you and me!

Jul 16 07:13 AM