Has Goldman Sachs high-frequency automated trading program become the victim of financial espionage?
On Friday FBI agents arrested a Russian immigrant at Newark Liberty Airport on charges that he stole top-secret computer trading codes from “a major New York-based financial institution.” Sources have told Matthew Goldstein at Reuters that this institution is none other than Goldman Sachs.
What’s more, the theft coincides with a breath-taking decline in the automated “program” trading activities of Goldman. In recent months, program trading–batches of trades of multiple stocks initiated by computer programs–on the NYSE has been dominated by Goldman Sachs. Just three weeks ago, the NYSE reported that program trades Goldman made for its own account represented 60% of all program trading. The following week, Goldman didn’t even show up on the list of program traders.
Here’s how Goldstein explains the situation.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege 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.
The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.
After his arrest on Friday, Aleynikov was formally charged with “theft of trade secrets” on Saturday. FBI agents removed all the computers from his home. His wife and his lawyer claim he is innocent.
Goldstein looked up Aleynikov’s Linked-In page, discovering that he joined Goldman in May 2007 and was vice president for equity strategy. His bio says he was responsible for “development of a distributed real-time co-located high-frequency trading platform.” That seems to be Goldman’s proprietary program trading options, which Aleynikov describes as “a very low latency (microseconds) event-driven market data processing, strategy and order submission engine.”
Goldman’s until-recently dominant role in program trading has garned lots of attention, as has the recent drop-off. Goldman’s rise to dominance has been attributed to a variety of causes. Back in April, we mentioned that government guarantees of financial sector debt may have had a distorting effect, driving some high-frequency traders out of the equities markets. Felix Salmon proposed that Goldman’s ability to borrow under the umbrella of an implicit guarantee may have given it cheaper access to capital that allowed it to make profits in markets that those with higher costs of capital could not. Goldman itself seemed to claim that it’s high rank on the program trading tables was just a result of it acting as a market maker in some mysterious NYSE liquidity program.
Of course, the leader in all discussions about the enigma of Goldman’s program trading has been a mysterious blogger who calls himself “Tyler Durden” and writes for a website called “Zero Hedge.“ Tyler points out that the NYSE suddenly announced that it was changing the way it calculated the program trading list, which also coincided with Goldman dropping off the list. This prompted some to wonder if the changes were made in order to conceal Goldman’s dominance. Tyler’s analysis of this arrest is complex but highly worth reading.
Entertainingly, there are videos of Aleynikov engaged in competitive ballroom dancing on youtube, which brings to mind another famous Russian immigrant, Aleksy Vayner. When we first heard about the case we thought for a moment that maybe, just maybe this Aleyni was Aleksy. But that would have been way too awesome.
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