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Friday, July 10, 2009

Bloomberg is coming down hard on Goldman

Submitted by Edward Harrison of Credit Writedowns.

The video linked below is a must-see piece of journalistic skepticism. The duo at Bloomberg News are discussing the recent alleged theft of trading code by a former Goldman employee Sergey Aleynikov who moved to a hedge fund called Citadel Teza, a hedge fund now being sued by Citadel and founded by Misha Malyshev, who left Citadel in February.  Their commentary is incredulous.  Their tone seems to ask: “Is the Government working for Goldman now?”

Here are a few gems:

  • “What is Goldman Sachs doing with this trading code that could manipulate the markets?”
  • “And Goldman got on the phone to the Justice Department and got them so fast to nail this guy, it’s almost – you wonder if they have a red line to the government.”
  • “It is amazing within one day of Goldman calling they had FBI agents at his driveway doing surveillance.  The next day they arrested him…”
  • “It’s interesting that the prosecutor from the testimony that I’ve read, it almost sounds as if he’s working at Goldman Sachs.”

More here

Related

Goldman Sachs Loses Grip on Its Doomsday Machine: Jonathan Weil – Bloomberg

Topics: Banking industry, Curiousities, Legal

Email This Post Email This Post Posted by Edward Harrison at 8:44 am

27 Comments » Links to this post

27 Comments:

  • Brick says:
    July 10, 2009 at 9:46 am

    Yes lots of questions on blogs starting with zerohedge then Karl Denninger over at the market ticker, but also on FTAlphaville. Much of the initial consternation was there before the arrests with some good analysis over at Themis Trading of how these HFT (High Frequency trading) programs use liquid assets like ETFS to move markets disproportionately.

    http://blog.themistrading.com/

    My own take would be that the arrest is a bit of a storm in a tea cup which has tipped off citadel to the future aspirations of Teza. I don't think these systems are designed for front running yet searching around and it becomes obvious that they have some front running elements. These tend to be used by brokers to alert to miss trades or mistakes, but in the hands of someone else could be used in other ways (See link below).

    http://www.a-teamgroup.com/article/progress-apama-partners-with-object-trading-to-deliver-ultra-high-frequency-trading-solution/

    That Goldman had such quick access to the FBI just shows the influence they have and the circumstances under which they discovered the theft is suspicious. Since Goldman seems to have cornered a large proportion of the market through these trading systems and through being the only SLP provider to the NYSE it seems politically naive of Goldman to assume people would not notice.
    Jonathan Weil at Bloomberg tends to be one of the reporters there to take note of so I am not surprised to see his involvement. There is of course nothing from CNBC yet.

  • Edward Harrison says:
    July 10, 2009 at 9:54 am

    I agree that this is a big brouhaha about what will end up being relatively little. The reason this particular clip is interesting – and important – is the degree to which it shows the worm is turning. The media, private citizens, everyone, is becoming much more skeptical about the goings on in the world of banking.

    This is a sea change that is necessary because our elected representatives are reluctant to deviate from the status quo. Barring financial Armageddon, we will not se any significant changes. That means we need to push for that change – o it's not going to happen.

    The media's transformation into a prodder and prober and reporter of events instead of an enabler of Wall Street is going to have to be part of that process.

    Personally, I have nothing against Goldman whatsoever. What I do like to see, however, is a bit more scrutiny of the relationship between government and Wall Street.

  • chasd00 says:
    July 10, 2009 at 10:06 am

    Count me in the "storm in a teacup" camp. All the real conspiracy started with the "manipulate the markets" remark which may or may not have just been a slip up.

    Then Daily Kos came out with a ridiculous claim GS could be sniffing traffic in the datacenter where NYSE's servers reside.

    The Market Ticker picked the Daily Kos post up and applied all the caps and bold print Denninger is known for which added fuel to the fire.

    And now Bloomberg is theorizing the FBI is in GS's pocket.

    It may not be as widely known in the finance circle as the I.T. circle but the FBI does not screw around with high profile computer crimes. If the FBI is tipped to a major computer crime they respond to it with the quickness and bring the pain, so to speak, in kind.

  • The Rude One says:
    July 10, 2009 at 10:54 am

    In the stock market as in the market for any other good, a limited number of sellers is an oligopoly and one seller is a monopoly. NYSE by its own admission pegs Goldman as accounting for over 40% of the volume on S&P index trades. It does not at all strain credulity to say that Goldman IS that market. It is a government-mandated liquidity provider and market maker which also trades for its own account. This is quite simply market domination. And the mechanism for nudging or prodding the market by means of index futures has a long and not terribly controversial history. The Goldman statement about manipulating the markets is completely accurate: anyone in possesion of the software is in a position to counter Goldman's trades and at the very least to manipulate Goldman, if not the entire market!

  • Walter says:
    July 10, 2009 at 11:27 am

    "The Goldman statement about manipulating the markets is completely accurate: anyone in possesion of the software is in a position to counter Goldman's trades and at the very least to manipulate Goldman, if not the entire market!"

    I'm having a hard time picturing a situation where simply having a program gave you that kind of power…

    Having a program that does something is only one part of the equation you also have to have access and the right level of security on the system you are going to run it on.

    The underlying suggestion seems to be that the "market" is only protected from manipulation by "security by obscurity". Surely people getting paid that kind of money are not that stupid.

  • Hugh says:
    July 10, 2009 at 12:01 pm

    This story just throws light on how markets really work. It shows that they have ceased to function as price finding mechanisms. Rather a company like Goldman manipulates prices across the market for its own benefit. Only a fool or a rube would invest in a market under such circumstances.

    It goes back to what Ed Harrison was saying yesterday about Goldman being essentially a giant hedge fund operated by and for itself. There is simply no reason for such an entity to exist from a market point of view. It goes against the very notion of what a market is for.

  • chasd00 says:
    July 10, 2009 at 12:13 pm

    Another thing, the compiler installation for the Goldman Sachs proprietary programming language Slang is greater than the 32MB stolen. So, even if you have the source code you still have to steal the compiler to actually run it. I suppose you could decipher the trading algorithms and try to implement them in your own system but I doubt they'd be as effective.

  • chasd00 says:
    July 10, 2009 at 12:15 pm

    and, according to a post on Slashdot, Goldman Sachs has its own proprietary database. So you need that too in order to run the GS software.

    I think the GS code is, apart from looking at algorithms, worthless.

  • chasd00 says:
    July 10, 2009 at 12:17 pm

    that above comment I made about Slang is incorrect, Slang is not GS programming language. Sorry.

  • Dave Raithel says:
    July 10, 2009 at 12:19 pm

    "…manipulate the market in unfair ways…" …?

    Yes, we must insist that the market is manipulated fairly.

  • mario says:
    July 10, 2009 at 1:09 pm

    I'd like GS to put the soft back to work. I had my trading strategy perfectly adjusted. Now I am lost.

  • asphaltjesus says:
    July 10, 2009 at 2:05 pm

    chasd00: It's not slang, it's erlang.

    I posted some comments over at zerohedge about it when they were fueling the flames. Somewhere along the way his facebook profile was published and it makes references to erlang, C#, some kind of messaging platform and SNMP. Nothing really special in any of that.

    Erlang is an open source procedural language. The project is sponsored/supported by Nokia for use in telephony applications where robust thread handling is a fundamental requirement. It is *very* good at handling large loads and doing so on many-way CPU systems. That makes it a good language to write electronic trading programs. Probably one of the better ones.

    I find it very hard to believe GS is way out in the lead on this. Again, none the tools used are very special.

    Also, please note that most non-IT people will conflate transaction systems as if they all communicate easily with one another when nothing could be further from the truth. They are *at least* extremely complicated silos that are extremely difficult to interconnect. I used extremely twice to convey how difficult gluing it all together would be.

    If the average reader won't let conspiracy theories die or continue to misdirect their anger, is the practice of programmed trading illegal somehow? Would an Attorney General prosecute over it? Is the SEC jumping on this? Nope. I would be very happy to be wrong about that.

    Is GS evil? Yes. But this is a meaningless side story equivalent to the 'executive bonuses' TARP mess. Taxpayers are angry. They totally miss the core issues, with the press working a simple angle on some very important issues. Which, works to the elite's benefit and reinforces their world view.

  • dd says:
    July 10, 2009 at 3:42 pm

    The regulatory structure is designed for a system that no longer exists. Vested interests only seek to maintain the illusion of "investor protection" for as long as possible.

    Applying securities law constructs to computerized trading and millisecond execution is like using automobile traffic laws to regulate aviation safety.

  • Independent Accountant says:
    July 10, 2009 at 3:54 pm

    EH:
    My immediate response to this story was, "Goldman owns the FBI too"! Ever since the Joseph Jett fiasco, 1994, I have seen leery of anything coming out of the NY FBI with respect to securities fraud or any indictments at the SDNY US attorneys office.

  • Peripheral Visionary says:
    July 10, 2009 at 4:09 pm

    GS may not have access to the trades for the whole NYSE before they're executed(although the NYSE should definitely double-check that just to make sure.) But they do have access to orders from their own clients before they're executed. Some of those are internal clients, like their own investment funds, but it's not impossible that they're front-running even their own internal clients. In any case, GS is sitting on top of a river of information, and the chances that they're using some of that to influence some of their prop desk trading is high.

  • Argel says:
    July 10, 2009 at 5:56 pm

    Ars-Technica has some more details information in Goldman's secret sauce could be loose online; markets beware.

    Since the data was compressed, the 32MB could have contained the compiler, especially if some really good compression software such as 7-Zip was used. Though 32MB still seems a bit small to contain the compiler.

    As for what he could do with it, considering where his next job was he certainly would have had access to trading information so I think he could have taken advantage of it. And by studying the code it might be possible to find a way to exploit the assumptions it makes.

  • plschwartz says:
    July 10, 2009 at 6:52 pm

    The US asst attorney in his statement about the arrest stated that whoever had the software stolen could manipulate the market. So we have from a high DOJ official that GS has the software to manipulate the market.
    Isn't is just a wonderful coincidence that this theft occurred on the heels of the Taibbi vampire squid article.
    Hopefully it will not just go away. Obama had best tred carefully lest this be his Watergate

  • Edwardo says:
    July 10, 2009 at 8:07 pm

    Edward Harrison wrote:

    "This is a sea change that is necessary because our elected representatives are reluctant to deviate from the status quo."

    There is some truth in that statement, but
    reluctance, which implies, among other emotions, fear, is not the problem, incompetence and corruption are the problem. Put another way, where there doesn't exist a fundamental lack of understanding about financial and economic matters mitigating reform, there is bribery, legalized or not

    Edward Harrison also said:

    "Barring financial Armageddon, we will not see any significant changes. That means we need to push for that change – o it's not going to happen."

    The logic here seems sound, but I believe it misses point. The fact that the "authorities" have not enacted genuine reform all but guarantees that the outcome will be catastrophic. In any case, had "they" taken the bull by the horns the outcome would probably be disastrous anyway because the necessary reforms entail the liquidation of debt of unprecedented size and scope.

  • Richard Kline says:
    July 10, 2009 at 11:36 pm

    I sincerely hope that the GS Huffer scandal blows up all over Goldmans.

    One has to ask the question, Why did/does GS _have_ such code? Now, we know that the US Guvmint has had superduper Friends in High Places to goose the markets for them. Yes, the options guywire is one way. But one might suppose that GS 'got the OK' to 'monitor trading flows;' y'know, to 'anticipate problems.' And one must not bind the mouths of the kine who tread the grain, what? Personally, I suspect that the Guvmint has long known that GS had such a capability. I'm not surprised that the FBIs would be on this quick regardless, for the IT security angle mentioned in comments above, but if GS called to say, "Our Guvmint hotwire is compromised," well I only wonder that Aleynikov is still alive. Maybe they'd kinda like to know who he was shopping it to.

    But the real issue isn't 'the Aleynikove Code.' It isn't even 'GS Huffer' access. It's WHAT THE HELL WERE THEY *DOING* WITH THAT INFO. O'course the Guvmint has, and will, totally looked the other way on *that*.

    Somebeody flick a match while the fumes are still concentrated, and let's see if this we can get a backdraft up Goldman's private money pipe.

  • skippy says:
    July 11, 2009 at 4:01 am

    @chasd00 & asphaltjesus…could it be used for grifting, spoil the party?

    Skippy…beware the gamer.

  • asphaltjesus says:
    July 11, 2009 at 11:09 am

    Richard Kline: Why did/does GS _have_ such code?

    Because they can afford the programmers. Really, it's that simple. If you had a software hook into the nyse trading software, you could write one too and you can run it on a plain Dell Dimension too. Can you perform tenths-second trades? No. Any firm with close physical proximity to the trading platform could though. (network latency and message passing timeouts would kill you otherwise.)

    Programmed trading is not illegal. Even at GS volume.

    Peripheral Visionary: GS is sitting on top of a river of information, and the chances that they're using some of that to influence some of their prop desk trading is high.

    No, it's not high. I can't describe to you how difficult that is.

    Let's say GS defies the odds and they can front-run customer trades, what's the penalty? Really, how bad could it be? They can argue whatever regs are on the books don't apply because "this one is different."

  • Siggy says:
    July 11, 2009 at 11:14 am

    The FBI response is stunning. The lack of definitive comment from GS is informative. There is more to this story than is being divulged. As to reading trade flows and front running. That is probably the issue. Some real information would be very helpful here.

  • skippy says:
    July 11, 2009 at 2:38 pm

    @asphaltjesus,

    Could this code be used to give trading flows physical dimensions, then view it in no clip mode and almost in real time. Seems everyone today wants 3D rendering of their work environment.

    Any way it wasn't off the rack tracking/trading gear, so what the hell was/is it. Are MS compression waves and speed of trading exploits to be had, does SG have a nice C++ macro bind, lol play in G mode.

    Skippy…Vdus yardguy or seagull must board.

  • edgar says:
    July 12, 2009 at 6:25 pm

    The FBI, indeed the entire gubmint, is Goldman's bitch.

  • skippy says:
    July 12, 2009 at 8:23 pm

    Well after a long look around the web and friends, it seems the SG code is just old algo's tweaked to serve their needs. Although, if SG has an edge its a simple hardware/latency issue, closer to the source, there fore they can exploit their speed advantage over others.

    Simple gamers tools re: faster rig, bigger pipe and closer to the server. If MS of time deside the kill (if both players hit the trigger at the same time online in real time), the kill goes to the one with the best setup.

    Yes I know about time stamps, but I would have to test its reponse times from various locations at differant times and loads before signing off on that issue.

    Skippy…Quants and their ilk love too game eh.

  • jbpeebles says:
    July 22, 2009 at 8:45 pm

    By July 23rd I plan to post an article to my blog http://www.jbpeebles.blogspot.com about allegations of Goldman Sach's quantitative/High Frequency Trading.

    At about 1:30 PM EST Wednesday on CNBC, Michelle Caruso-Cabrera and Charlie Gasparino attacked ZeroHedge, a blogger whose been pestering Gasparino about possible favoritism, for not covering the "quant flushing" story.

    Their disrespect towards the blogging community showed just how politicized CNBC is, and how deferential to Goldman Sachs the financial media is.

    For more see my upcoming post.

  • Anonymous says:
    July 23, 2009 at 6:09 am

    Skippy – shut up

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