Goldman Code Theft Bombshell

Something really ugly popped up on Daily Kos Tuesday late in the afternoon.....

...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.

Two things come out of this:

1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...

(2. ... is way off point....)

God help Goldman (GS) if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!

God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......

This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can "see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous mode" and SILENTLY sniff that traffic!

ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION.....

Folks, I have no way to know what the code in question does, but if there's anything to this - anything at all - there is a major, as in biggest scam of the century - scandal here - something much, much bigger than Madoff or Stanford.

What would this mean, if it was all to prove up?

It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute messages - before they were committed in the transaction stream. Such a "SNIFF" would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.

The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively "stealing pennies" from each transaction they were able to front-run.

Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had "special network access." Nothing. All I have to go on with regards to "market manipulation" (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.

This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos. But consider the following:

The last few days the the market has traded "organically." I and many other market participants have noted that prior to the week before July 4th the market had been acting "very odd" - normal correlations between interest rate, foreign exchange the the stock markets had been on "tilt" for the previous couple of months, with the amount of "tiltage" increasing dramatically in the last three or four weeks. In fact, many of my usual indicators that I use for daytrading had become completely useless. Suddenly, just before the July 4the weekend, everything started correlating normally again. I have no explanation for this "light-switch" change but it aligned almost exactly with the day the NYSE had "computer problems" and extended trading by 15 minutes. Was there a configuration change made to their networking infrastructure, one asks?

Zerohedge's information, if you believe it, seems to point toward some sort of distortion. The cite above claims statistically "as likely as an asteroid hitting earth it is not true" proof of distortion in the market. I have not analyzed the data to independently validate that conclusion, but even if the odds of these "effects" in the market being random chance are only as good as getting hit by a tornado this afternoon......

Every market participant deserves answers on this point. Specifically to the NYSE and all other markets where collocation connections are made and allowed:

• Was it possible for message traffic to be "seen" by computers on your network and collocated into your infrastructure by other than the originator and recipient? That is, was it physically possible for anyone to "sniff" messages to and from other market participants.
• If it was possible, is it no longer possible, and if so, when was that change made?

I believe the SEC and FBI must direct a subpoena at all market exchanges for an under-oath answer to question #1. If the answer to that question is "yes" then every market participant who had or has equipment collocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed "sniffing" traffic and front-running orders.

The charge made on the pages of Daily Kos is incredibly serious. If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

Market participants deserve an answer to these questions.

Comments

[Gtarras:]

if true, this is an outrage. i hope somebody does something about it.

Jul 08 05:25 PM

[nobby73:]

If they did this through their role in the PPT, this is poacher turned gamekeeper, still doing a bit of poaching on the side.

The only response is to withdraw any investments on US exchanges until properly investigated. If true, it is insider trading on the most massive scale.

Jul 08 05:39 PM

[Swashbuckler:]

Surely you don't believe this is news to the government. Hell, they're BEHIND it. The notion that they will act on this "revelation" is laughable. It's like asking the government to indict themselves. Everybody who actively trades the markets has known for months that Goldman has had the fix in.

Jul 08 05:41 PM

[Silver Dragon:]

goldman sachs is itself guilty of "manipulating markets
in unfair ways". Remember they called for oil at $200
a barrel and tried to make that price happen. I believe
they have controlled other commodities including
mentals.

Jul 08 05:46 PM

[Mad Hedge F...:]

Uh Oh. If you want to read the greatest hatchet job of all time on a financial institution, pick up the July 9-13 issue of Rolling Stone and check out the piece on Goldman Sachs (GS) by Matt Taibbi, which the blogosphere is tittering about. Yes, the office was worried when they saw me walk in with the Jonas Brothers on the front cover. According to the story, Goldman Sachs is responsible for every financial crisis during the last eighty years, including the 1929 crash, the dotcom bubble, the housing craze, the sub prime crisis, the oil spike, the bank bailout, and next, the trading of carbon credits created by cap & trade. Oh yes, and they control every aspect of the US government. Written in the edging, snarky, f*** you kind of style that appeals to a younger audience, any professional journalist will recognize this for what it really is. This is the most forceful buy recommendation of a stock I have ever seen. If GS really is that powerful, back up the truck. I want to own a stock with a “damn the torpedoes, full speed ahead” management who that will boost earnings at any cost. They’re just the alpha males in a world of predators. Someone has to be number one. I think Taibbi is just angry that he could never get in the front door there, let along get a job. Some people will say anything to sell their publication.

Jul 08 05:54 PM

[Gaucho:]

Do you guys really expect that the wealthy aristocracy will pay for their crimes. If you do then you are truly stupid. Look at a site called DEEP CAPTUE and what happened to DNDN that left 60,000 men dead. The laws in this country are written on toilet paper. Break the law unroll and wipe Repeat

Jul 08 07:10 PM

[Roger Knights:]

I wonder if this alleged front-running affected the NASDAQ? Could its behavior be compared to the NYSE's to see if it escaped the distortion ZH noticed?

I wonder if Quant firms could shed some light on this matter. I.e., does this front-running scenario make sense to them, in light of the market's odd behavior? According to ZH (a month ago), they've been losing money for months because of some sort of manipulation.

The extent of involvement of the gov't. or the Fed would be more important than GS's guiltiness, if this is true. (Even if they didn't KNOW, they must have suspected, like Madoff's investors.)

If it turns out that most of the recent, unprecedented market rally was artificial, engineered as a result of trickery such as this, or even if that's strongly suspected, one result could/would be a quick wipe-out of most of its gains. (And maybe a bit of a boost for gold?)

This would be the blackest of black swans. If it's correct, that Sergy guy "knows too much." He'd better be careful.

===========
Incidentally, there seems to be a format error in the article, which confused me. The second indented (i,e,. quoted) paragraph, which begins "Zerohedge's information, if you believe it," should not have been indented. It's really KD himself speaking. If I'm correct, I hope this will get revised.

Jul 08 10:15 PM

[Roger Knights:]

PS: One item in the news accounts of the stolen code is suspicious: the mention of “microsecond” timing. That would be consistent with front-running.

Jul 08 10:20 PM

[Roger Knights:]

"I believe they have controlled other commodities including mentals."

Pushing up the green-shoot meme, perhaps.

Jul 08 10:25 PM

[Ergo:]

The importance of the issue and the evidence to date mandate at minimum a serious investigation. I'm still waiting to hear about one....

Jul 08 10:33 PM

[Swashbuckler:]

Don't hold your breath.


On Jul 08 10:33 PM Ergo wrote:

> The importance of the issue and the evidence to date mandate at minimum
> a serious investigation. I'm still waiting to hear about one....

Jul 08 10:47 PM

[zorrow:]

Remember when the FBI recruited Whitey Bolger to infiltrate and inform on the Mafia under the theory it takes a crook to catch a crook? Well now the administration has enlisted Goldman Sachs to help uncover "terrorist" finances under the same theory. I think it will be just as successful. GS is a lot like John Law, the 17th century rogue who destroyed the French monarchy that had embraced his Ponzi schemes. Obama, you are just hugging Iago. You will suffer the same fate, unless you arrest these GS criminals.

Jul 09 12:04 AM

[Anthony B:]

How can we make sure this investigation happens? If it really did happen, then billions of dollars is more than enough to cover this up.

Best hope is that one of the coders or someone implementing the infrastructure comes forward.

Jul 09 12:56 AM

[User 292749:]

A couple of points simplify this picture.

First, the action resembles the "wire game" described in the Paul Newman-Robert Redford film "The Sting". The action in the film was interception and delay of racing results to separate a large mark, Doyle Lonigan (Robert Shaw), from his money.

Goldman's game is interception of trading communication. Unlike "The Sting", Goldman ha(s/d) the ability to influence the trading in real time.

Second, an old adage says that when a thief is robbed, he will not call the cops. That is true. But there is a corollary: if a thief is robbed, and he does call the cops, it is good bet that he either is the cop or he has bought the cop.

Well, let's examine the record. Larry Summers, economic advisor to Presidents Clinton and Obama, and Goldman alum. Check. Robert Rubin, Secretary of the Treasury under Pres. Clinton and Goldman alum. Check. Henry Paulson, Secretary of the Treasury under Pres. George W. Bush and Goldman alum. Check. Neil Kashkari, TARP coordinator under Sec'y Paulson and Goldman Alum. Check. Timothy Geithner, former Chair of the New York Fed, current Secretary of the Treasury and Goldman alum. Check.

Who is the thief? Who is the cop? With regard to the likelihood of action against this illegal conduct, what again are the odds of a tornado strike on the author's house this afternoon?

Peter J. of Minneapolis

In

Jul 09 08:22 AM

[Karl Denninger:]

If/when Sergio goes to trial it will be quite interesting.

Realize that this code was apparently "in the wild" after being stolen for about a month before anyone was told about it.

One wonders - perhaps someone (besides Goldman) **was using it**?

You would think not, but.....

BTW, my background is in network design and programming, including large-scale, real-time transasction systems. Give me or any other competent programmer that source and I could tell you rather quickly if siphoning off a message stream like this was the purpose behind it - the system calls involved in putting an interface in promiscuous mode are rather obvious and have no other possible purpose.

Jul 09 08:27 AM

[User 305589:]

I am not to discuss the journalistic quality of the article or whether all the claims in it are true. (Quite a big number of them, are, undeniably and the stolen code that "could be used for extensive market manipulation" is just another evidence whom you are dealing with when it comes to Goldman Sucks.)

But someone with your professional background should know that the shareholder is the last in line at GS. First come the partners and then the employees, when it comes to profit distribution. Shareholders get what is left - and shoulder all the risk. And that there are huge risks becomes apparent by just a brief look at their L3 assets and the fact that GS has been cash flow negative for the past 5 years despite all the supposed mega-profits.
Why do you think has Warren Buffet opted for perpetual preferred stock yielding 10% p.a. AND attached the strings that Goldman's major partners are not allowed to cash out from the company before he got his investments back? This imho is the clearest message there can be from one of the best investors ever that you can make a ton of money with GS, but only if you know exactly how and if you protect yourself from the GS guys. Good luck with buying Goldman#s stock. You may still make good money, mind you, but the risk-reward is pretty awful.


On Jul 08 05:54 PM Mad Hedge Fund Trader wrote:

> This is the
> most forceful buy recommendation of a stock I have ever seen. If
> GS really is that powerful, back up the truck. I want to own a stock
> with a “damn the torpedoes, full speed ahead” management who that
> will boost earnings at any cost. They’re just the alpha males in
> a world of predators.

Jul 09 09:07 AM

[doubleguns:]

This can be pursued by other govts since their citizens have been effected by this as well. I don't have much faith in our govt of GS employees doing anything about this. Instead they will try to cover it up or sweep it under the carpet. Hopefully international pressure will do something.

Jul 09 09:08 AM

[H. T. Love:]

Karl,

Although you are right about the code, it would have required the cooperation or incompetence of the site to get the packets to the "box".

Ignoring "wifi" types of networking, this can be done if the "box" is acting as a firewall, router or gateway. It can also be done if the unit is connected to a "hub" rather than a switch. In other words, there must be some kind of physical wire from the source(s) of the traffic to the box.

If any type of "wifi", "bluetooth", or other over-the-air network is available, this could be the same scenario - sniffing is possible if the decryption needed to "tap" other connections is active.

If any administrator hooked this box to a hub, he/she is *at least* incompetent, even if not complicit in the fraud. Ditto if that box is acting as any kind of firewall, router or gateway. Ditto if any kind of over-the-air network is active.

That means that the starting point of the investigation is to first discover the physical connection (including any over-the-air networking) of the box. It shouldn't take much to scare the bejeezus out of some admin and cause a full disclosure of the topology.


Secondly, there are utilities available that do this sniffing without custom code. And it is available for WinBlows boxen too. By piping the output from the utilities to the custom code, the job can be accomplished without including any custom network code at all.

Another possibility is that if the box is acting as a gateway, router or firewall, sniffing would not be required at all. Packets in, examine, insert our own packets and pass the whole bunch out.

Duck soup.

I *hope* there is some follow-up on this, but I'll not be surprised if there is none.

HardToLove

Jul 09 09:22 AM

[TinyTim:]

So when will this show up on the 6pm news?
Or will I have to wait for Taibbi (again)?

Jul 09 05:11 PM

[dizzyfingers:]

...oops, I guess no diversifying position in commodities for me...and it seems like cash is, indeed, king. Why would anyone trade in this enviornment?


On Jul 08 05:46 PM Silver Dragon wrote:

> goldman sachs is itself guilty of "manipulating markets
> in unfair ways". Remember they called for oil at $200
> a barrel and tried to make that price happen. I believe
> they have controlled other commodities including
> mentals.

Jul 10 12:28 PM

[dizzyfingers:]

That's one way to look at it. Another way is that GS is the kind of company that fakes losses down to zero bottom line in order to defraud stockholders.

Jul 10 12:30 PM