Goldman Sachs: Thoughts on the Developing Stolen Trade Secrets Scandal

Jul. 7.09 | About: Goldman Sachs (GS)

Consider, the story about Goldman Sachs (NYSE: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