Rajiv Sethi: The Spider and the Fly

By Rajiv Sethi, Professor of Economics, Barnard College, Columbia University. Cross posted from his blog

Michael Lewis has written a riveting report on the trial, incarceration, release, and re-arrest of Sergey Aleynikov, once a star programmer at Goldman Sachs. It’s a tale of a corporation coming down with all its might on a former employee who, when all is said an done, damaged the company only by deciding to take his prodigious talents elsewhere.

As is always the case with Lewis, the narrative is brightly lit while the economic insights lie half-concealed in the penumbra of his prose. In this case he manages to shed light on the enormous divergence between the private and social costs of high frequency trading, as well as the madness of an intellectual property regime in which open-source code routinely finds its way into products that are then walled off from the public domain, violating the spirit if not the letter of the original open licenses.

Aleynikov was hired by Goldman to help improve its relatively weak position in what is rather euphemistically called the market-making business. In principle, this is the business of offering quotes on both sides of an asset market in order that investors wishing to buy or sell will find willing counterparties. It was once a protected oligopoly in which specialists and dealers made money on substantial spreads between bid and ask prices, in return for which they provided some measure of price continuity.

But these spreads have vanished over the past decade or so as the original market makers have been displaced by firms using algorithms to implement trading strategies that rely on rapid responses to incoming market data. The strategies are characterized by extremely short holding periods, limited intraday directional exposure, and very high volume. A key point in the transition was the adoption in 2007 of Regulation NMS (National Market System), which required that orders be routed to the exchange offering the best available price. This led to a proliferation of trading venues, since order flow could be attracted by price alone. Lewis describes the transition thus:

For reasons not entirely obvious… the new rule stimulated a huge amount of stock-market trading. Much of the new volume was generated not by old-fashioned investors but by extremely fast computers controlled by high-frequency-trading firms… Essentially, the more places there were to trade stocks, the greater the opportunity there was for high-frequency traders to interpose themselves between buyers on one exchange and sellers on another. This was perverse. The initial promise of computer technology was to remove the intermediary from the financial market, or at least reduce the amount he could scalp from that market. The reality has turned out to be a boom in financial intermediation and an estimated take for Wall Street of somewhere between $10 and $20 billion a year, depending on whose estimates you wish to believe. As high-frequency-trading firms aren’t required to disclose their profits… no one really knows just how much money is being made. But when a single high-frequency trader is paid $75 million in cash for a single year of trading (as was Misha Malyshev in 2008, when he worked at Citadel) and then quits because he is “dissatisfied,” a new beast is afoot. 

The combination of new market rules and new technology was turning the stock market into, in effect, a war of robots. The robots were absurdly fast: they could execute tens of thousands of stock-market transactions in the time it took a human trader to blink his eye. The games they played were often complicated, but one aspect of them was simple and clear: the faster the robot, the more likely it was to make money at the expense of the relative sloth of others in the market.

This last point is not quite right: speed alone can’t get you very far unless you have an effective trading strategy. Knight Capital managed to lose almost a half billion dollars in less than an hour not because their algorithms were slow but because they did not faithfully execute the intended strategy. But what makes a strategy effective? The key, as Andrei Kirilenko and his co-authors discovered in their study of transaction-level data from the S&P E-mini futures market, is predictive power:

High Frequency Traders effectively predict and react to price changes… [they] are consistently profitable although they never accumulate a large net position… HFTs appear to trade in the same direction as the contemporaneous price and prices of the past five seconds. In other words, they buy… if the immediate prices are rising. However, after about ten seconds, they appear to reverse the direction of their trading… possibly due to their speed advantage or superior ability to predict price changes, HFTs are able to buy right as the prices are about to increase… They do not hold positions over long periods of time and revert to their target inventory level quickly… HFTs very quickly reduce their inventories by submitting marketable orders. They also aggressively trade when prices are about to change. 

Aleynikov was hired to speed up Goldman’s systems, but he was largely unaware of (and seemed genuinely uninterested in) the details of their trading strategies. Here’s Lewis again:

Oddly, he found his job more interesting than the stock-market trading he was enabling. “I think the engineering problems are much more interesting than the business problems,” he says… He understood that Goldman’s quants were forever dreaming up new trading strategies, in the form of algorithms, for the robots to execute, and that these traders were meant to be extremely shrewd. He grasped further that “all their algorithms are premised on some sort of prediction—predicting something one second into the future.”

Effective prediction of price movements, even over such very short horizons, is not an easy task. It is essentially a problem of information extraction, based on rapid processing of incoming market data. The important point is that this information would have found its way into prices sooner or later in any case. By anticipating the process by a fraction of a second, the new market makers are able to generate a great deal of private value. But they are not responsible for the informational content of prices, and their profits, as well as the substantial cost of their operations, therefore must come at the expense of those investors who are actually trading on fundamental information.

It is commonly argued that high frequency trading benefits institutional and retail investors because it has resulted in a sharp decline in bid-ask spreads. But this spread is a highly imperfect measure of the value to investors of the change in regime. What matters, especially for institutional investors placing large orders based on fundamental research, is not the marginal price at which the first few shares trade but the average price over the entire transaction. And if their private information is effectively extracted early in this process, the price impact of their activity will be greater, and price volatility will be higher in general.

After all, it was a large order from an institutional investor in the S&P futures market that triggered the flash crash, sending indexes plummeting briefly, and individual securities trading at absurd prices. Accenture traded for a penny on the way down, and Sotheby’s for a hundred thousand dollars a share on the bounce back.

In evaluating the impact on investors of the change in market microstructure, it is worth keeping in mind Bogle’s Law:

It is the iron law of the markets, the undefiable rules of arithmetic: Gross return in the market, less the costs of financial intermediation, equals the net return actually delivered to market participants.

This is just basic accounting, but often overlooked. If one wants to argue that the new organization of markets has been beneficial to investors, one needs to make the case that the costs of financial intermediation in the aggregate have gone down. Smaller bid-ask spreads have to be balanced against the massive increase in volume, the profits of the new market makers, and most importantly, the costs of high-frequency trading. These include nontrivial payments to highly skilled programmers and quants, as well as the costs of infrastructure, equipment, and energy. Lewis notes that the “top high-frequency-trading firms chuck out their old gear and buy new stuff every few months,” but these costs probably pale in comparison with those of cables facilitating rapid transmission across large distances and the more mundane costs of cooling systems. All told, it is far from clear that the costs of financial intermediation have fallen in the aggregate.

This post is already too long, but I’d like to briefly mention a quite different point that emerges from the Lewis article since it relates to a theme previously explored on this blog. Aleynikov relied routinely on open-source code, which he modified and improved to meet the needs of the company. It is customary, if not mandatory, for these improvements to be released back into the public domain for use by others. But his attempts to do so were blocked:

Serge quickly discovered, to his surprise, that Goldman had a one-way relationship with open source. They took huge amounts of free software off the Web, but they did not return it after he had modified it, even when his modifications were very slight and of general rather than financial use. “Once I took some open-source components, repackaged them to come up with a component that was not even used at Goldman Sachs,” he says. “It was basically a way to make two computers look like one, so if one went down the other could jump in and perform the task.” He described the pleasure of his innovation this way: “It created something out of chaos. When you create something out of chaos, essentially, you reduce the entropy in the world.” He went to his boss, a fellow named Adam Schlesinger, and asked if he could release it back into open source, as was his inclination. “He said it was now Goldman’s property,” recalls Serge. “He was quite tense. When I mentioned it, it was very close to bonus time. And he didn’t want any disturbances.” 

Open source was an idea that depended on collaboration and sharing, and Serge had a long history of contributing to it. He didn’t fully understand how Goldman could think it was O.K. to benefit so greatly from the work of others and then behave so selfishly toward them… But from then on, on instructions from Schlesinger, he treated everything on Goldman Sachs’s servers, even if it had just been transferred there from open source, as Goldman Sachs’s property. (At Serge’s trial Kevin Marino, his lawyer, flashed two pages of computer code: the original, with its open-source license on top, and a replica, with the open-source license stripped off and replaced by the Goldman Sachs license.)

This unwillingness to refresh the reservoir of ideas from which one drinks may be good for the firm but is clearly bad for the economy. As Michele Boldin and David Levine have strenuously argued, the rate of innovation in the software industry was dramatic prior to 1981 (before which software could not be patented):

What about the graphical user interfaces, the widgets such as buttons and icons, the compilers, assemblers, linked lists, object oriented programs, databases, search algorithms, font displays, word processing, computer languages – all the vast array of algorithms and methods that go into even the simplest modern program? … Each and every one of these key innovations occurred prior to 1981 and so occurred without the benefit of patent protection. Not only that, had all these bits and pieces of computer programs been patented, as they certainly would have in the current regime, far from being enhanced, progress in the software industry would never have taken place. According to Bill Gates – hardly your radical communist or utopist – “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”

Vigorous innovation in open source development continues under the current system, but relies on a willingness to give back on the part of those who benefit from it, even if they are not legally mandated to do so. Aleynikov’s natural instincts to reciprocate were blocked by his employer for reasons that are easy to understand but very difficult to sympathize with.

Lewis concludes his piece by reflecting on Goldman’s motives:

The real mystery, to the insiders, wasn’t why Serge had done what he had done. It was why Goldman Sachs had done what it had done. Why on earth call the F.B.I.? Why coach your employees to say what they need to say on a witness stand to maximize the possibility of sending him to prison? Why exploit the ignorance of both the general public and the legal system about complex financial matters to punish this one little guy? Why must the spider always eat the fly?

The answer to this, I think, is contained in the company’s response to Lewis, which is now appended to the article. The statement is impersonal, stern, vague and legalistic. It quotes an appeals court that overturned the verdict in a manner that suggests support for Goldman’s position. Like the actions of the proverbial spider, it’s a reflex, unconstrained by reflection or self-examination. Even if the management’s primary fiduciary duty is to protect the interests of shareholders, this really does seem like a very shortsighted way to proceed. 

* * *

Lambert here: Tinfoil hat time, but the focus on really smart quants “predicting something one second into the future” — shades of the MacGuffin in William Gibson’s Zero History — seems weird to me. Given all-pervading NSA surveillance and storage capacity (data and voice) wouldn’t it make more sense to trade for the future with the appropriate corrupt or interested officials, instead trying to work indirectly through some geek? After all, former NSA IG Joel Brenner, now of the Chertoff Group, did say we’ve “turned intelligence into a regulated industry”. So.

Print Friendly, PDF & Email
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn1Share on Google+0Buffer this pageEmail this to someone
This entry was posted in Guest Post on by .

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

57 comments

  1. Howard Beale IV

    Now let’s throw some gasoline onto this fire: Guess which government entity has atually added back to the open source pool?

    Yup, The the reviled NSA.

    1. Yonatan

      To paraphrase ‘b’ at MoA, what have you got against the NSA? After all, it is the only part of government that actually listens to the people.

    2. accidentalfission

      I’m not an expert on open source licenses but many, Gnu Public License, Lesser Gnu Public License and probably others are legally enforceable and require the user to release their modified code back into the public domain.

      Other licenses, FreeBSD, Apache, etc. may be different. Again, I’m not an expert.

      1. LifelongLib

        My understanding is you have to release the source code if you distribute the binaries, but you’re not obligated to release code if it’s for private use only.

  2. Sandwichman

    Tinfoil II: seems to me that the impetus for rogue NSA/GS trading wouldn’t have to come from GS. Think Oliver North.

    As long as there are any legal constraints and oversight whatsoever on covert intelligence ops there will be the irresistible temptation (and opportunities) to skirt those constraints by off-the-books, out-of-the-loop, say-no-more, wink-wink, nudge-nudge activities. Hell, it’s what I would do if I were them. Assuming that it violates NSA policy, how would the NSA ever enforce the policy amongst its and contractors’ thousands of analysts. And who will guard the guardians?

    1. Yves Smith

      The DoD literally has trillions of dollars it could not account for as of a few years back. Trillions. As in serious % of one year’s GDP. John Paulson (greatest trade ever!) only made billions.

      It doesn’t need to trade. It basically can get whatever it wants via official channels. And it can get bigger sums too.

      IMHO, the idea that the DoD engages in front running is tinfoil hattery. It does not have the connections and does not have the temperament (DoD only likes private sector types that are clear alllies, like defense contractors. It has a huge revolving door there, pretty much none to Wall Street). And the headset is chalk and cheese. DoD is seriously into command and control. The swashbuckling that goes on at low levels at Wall Street (and gambling in general) is suspect to them. DoD is also in a low intensity range war with finance over bank predatory practices towards military personnel.

      That does NOT mean that individuals don’t trade on this sort of info, BTW.

  3. mookie

    Michael Lewis’s essay is excellent, and I was genuinely saddened by the actions of the government. For those of us that still believe in the principles that our government supposedly governs by, it’s completedly incomprehensible that Aleynkov is still being prosecuted.

    The only possible explanation is that our governing class completely identifies with and/or is in the pocket of the financial class. “The best and the brightest” are in fact the worst of the worst. Kill. Them. All.

    1. Lambert Strether Post author

      I’m not a violence advocate. So let’s not kill them. Rather, let’s give these sociopaths jobs with real social utility that also free up people to do work that demands a capacity for empathy. They might empty bedpans, for example, freeing nurses. Or clean floors. Perhaps warehouse work. Of course, they’d have to continue to wear suits as a badge of shame.

      1. profoundlogic

        Hi Lambert,

        Sorry to point out the painfully obvious, but I think this is where we fail miserably to address this problem. It seems that both you and Beard think these psychopaths are subject to the same societal constructs; they aren’t!

        It’s pretty obvious that the criminal elite have no shame. You can live your life well, but that will not make one damn bit of difference to the predatory class. It just makes you easier prey. This is what they are counting on, what they thrive on. They are counting on the fact that you have a conscience….because they don’t!

        1. Lambert Strether Post author

          Hmm. Well, I guess this is where we have the discussion about whether the Bolsheviks were really better than the Czars, and indeed how different they really were.

          Granted this is a hypothetical, and so there’s really no real way to answer, but there are certainly rather a lot of corpses on the Bolshevik side of the scale.

          I’m suspicious of revolutionay vanguards who want to slaughter their enemies because I believe they tend to turn into what they opposed (or possibly even putatively opposed).

          It’s always possible to make things worse….

          1. Nathanael

            The Bolsheviks were better than the Czars. There is really no question about it.

            At the time, people had some questions about it. Those questions were partly answered by (1) the Russo-Japanese War of 1905, and subsequently (2) the dissolution of the Duma and the stacking of the election system.

            Despite this, people were willing to give the Tsar a chance until (3) he got them into *World War One*, and proceeded to *lose*. That was the point at which it was clear to everyone that *anything* was better than the Tsar.

            If you’re counting Bolshevik-caused deaths, you have to count every Russian death in WWI to the Tsars, given who got Russia into it.

            At some point, anything is better than what you have. We’re not there yet in the US. If we continue on this path, though, we will be. We’re already in the “losing foreign wars repeatedly” stage; if we get to the “losing domestic wars” stage, the government is definitely cooked.

        2. F. Beard

          Yes, but why do so-called good people support a government-backed counterfeiting cartel, the banks, and then complain about greed when people use them to steal?

          I’m saying we should eliminate government privileges for the banks and prove they’re not really needed anyway. We can do without them.

      2. mookie

        You’re right, of course Lambert. I’m sorry I wrote that, it was the wrong thing to say.

      3. Barni1

        If you prevent a predator from predating then you have killed it. If you simply slow it down or delay or distract it, it will eventually kill you and effectivly you will have committed suicide by indifference.

    2. F. Beard

      The best revenge is a life well lived. So why not reform the money system along ethical lines and prove that progress does NOT require injustice nor even a boom-bust cycle?

  4. middle seaman

    Predicting, even the next short time interval, seem to be an accepted capability of program and men in this post. In many fields, prediction is highly imprecise and difficult. How come the quite complex stock market is so comfortably predictable?

    Is it possible that the algorithmic trades and their high volumes actually cause the alleged prediction to happen? Shouldn’t high volume buying of solid stock cause a rise in the price of the target stock?

    1. NotSoSure

      Exactly, what’s the real magic? My suspicion is that HFT = sophisticated front running of clients’ orders. I have also read somewhere about HFT and rebates. The premise is that the exchanges would credit you with rebates if you submit limit orders since those provide liquidity. If your limit order is big enough apparently you can just earn rebates that will cover your transaction costs AND still give you a profit!!

      I think outsized profits may also be coming down in HFT. The latest financial statement of Getco (one of the best HFT firms out there)shows a big collapse in profit margin.

      1. Yonatan

        My understanding is that the software puts out rapidly changing price sequences of small orders attempting to discover the price the market is prepared to deal at. Once you know the market price, then a large scale deal could be made to exploit that knowledge before the market has time to react.

    2. digi_owl

      Observe the Apple stock price around account call time, never mind product revelation (heh) day, and it behaves in a predictable manner. How far it moves is difficult to say, but it will bounce around as holders divest and invest as news hits the various channels. And if you’re into arbitrage you don’t care about the end points, only the direction of travel.

      And on a less sophisticated level, low latency connections between trade floor servers and your own systems. In essence the modern version of having fast boats with radios meet the large ships to learn their cargo ahead of time. Not quite insider trading, but the next best thing.

  5. Mark P.

    Middle Seaman wrote: “Is it possible that the algorithmic trades and their high volumes actually cause the alleged prediction to happen? Shouldn’t high volume buying of solid stock cause a rise in the price of the target stock?”

    Quite. And, of course, HFT represents 70 percent of all trading and 99.9 percent of all quotes on stock exchanges, last time I looked.

    The general possibilities of HFT are understandable if you’re already familiar with some of the strategies of the ‘program traders,’ which helped trigger the Black Monday crash of October 19, 1987 —
    http://en.wikipedia.org/wiki/Black_Tuesday_(1987)#Causes

    –and then you picture those algorithmic strategies on steroids.

    Specifically,some predatory algos that will work are bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, i.e. an inherently deflationary one).

    1. Mark P

      And another thing is that, if one goes through the figures for 2008-2009, it’s stunningly obvious that: –

      [a] Essentially, no stock market existed at that point other than the Potemkin stock market created by the HFT departments of the proprietary trading desks of the big Wall Street firms like GS;

      [b] Wall Street did this with the eager collusion and support of Washington.

  6. LifelongLib

    At my state government job anything on my office computer is government property and any activity on it is subject to monitoring. This isn’t usually enforced very vigorously but all employees sign an agreement to that effect.

    1. Leviathan

      I’m afraid you are rather missing the point. And the point is:

      Today’s FBI=Yesteryear’s Pinkerton Agents

      Don’t know who the Pinkerton Boys were or how they enforced the interests of the 1% over the rights of the many? I suggest you go rent John Sayles’ excellent film, Matewan.

  7. Brooklin Bridge

    Most Open Source I have worked with allows one to write private (proprietary) code as long as it does not modify the behavior of the open source code. So you insulate your group of operations/algorithms such that the open source sections remain untouched (do not need re-compile). This is usually accomplished by a hook of some sort written especially for the purpose that DOES have to be integrated and IS therefore necessary to share. Sometimes the hooks are provided for you by the open source itself. In either case the hook is a tiny bit of code, insignificant in terms of effort; it’s only job is to insulate the proprietary piece from affecting the main body of open source.

    This issue has been around for a long time (over 30 years) and so most developers are familiar with the problem and are careful not to write generic modules of code (such as the two computer fail safe algorithm) that logically should be part of the open source project when working on company time. It isn’t just financial companies that insist on NOT sharing. It’s pretty much every damn company that exists. Perhaps that’s too much of a generalization, but I imagine civic minded companies are the exception – not the rule.

    The contracts I signed when starting a job with a company often had a clause about any personal code one was working on. This was a good occasion to mention a few “place holders” for just such occasions as working on open source. An other strategy – particularly for code heads of Aleynikov’s caliber – is to hold off on any such efforts until one is between jobs and then briefly join the open source group and give back. Why would you want to give back? Even programmers such as Aleynikov often learn a great deal by looking at open source packages because they frequently solve very interesting and significant problems. As long as what you contribute is generic or at least not specific to your last company, you are ethically (I’m not sure of legally) in the clear.

    I imagine Goldman Sachs has carried the issue far beyond anything I ever experienced, especially with someone such as Sergey Aleynikov who’s code can be legitimately considered highly valuable before he even writes it. But it does seem a little odd that he was taken so much by surprise.

    1. digi_owl

      One can also modify open source code for internal use, at least under the GPL. But if the resulting binary is released to the greater public, the matching source code has to join it.

      1. Brooklin Bridge

        But if the resulting binary is released to the greater public, the matching source code has to join it

        Exactly, and that’s the problem for most companies.

          1. Brooklin Bridge

            A lawsuit waiting to happen? It didn’t used to be, but it always was a serious concern so as PauArt mentions, programmers went through a lot of effort to avoid using these packages the wrong way and the open source committees, for their part, tended to bring suits against larger companies and/or those that were flagrantly abusing the spirit of the contract.

            As long as the open source package stayed in house, you were pretty safe, so one strategy was to use these things for the development phase. A parallel effort would be underway to build in-house or buy modules that would do the same thing and you would switch over to those the minute someone actually paid you for a copy. In cases where the open software was critical and you couldn’t do either of those things to avoid it, you would often fall back on the hook strategy I mention above. Most contracts allowed you to integrate proprietary software (yours) and not share it with the world at large as long as it did not modify the binary of their main open software package. When even that wasn’t possible, you were stuck and you either lived with the restrictions – and that was potentially a real pain – or you scrapped the project (and many companies did just that). In effect, this meant you had to maintain a public API into part(s) of your software.

            Obviously what is being described in the post above goes way beyond anything like that and the real question is how they are getting away with it. Also, it seems fair to ask on the subject of Aleynikov, who the hell among top notch programmers is now going to want to work for Goldman Sachs?

      2. calsa

        Goldman can get away with that, but this:

        ‘At Serge’s trial Kevin Marino, his lawyer, flashed two pages of computer code: the original, with its open-source license on top, and a replica, with the open-source license stripped off and replaced by the Goldman Sachs license’

        based on most licenses I’ve seen sounds straight up illegal. Even licenses that state you can use the software pretty much any way you like usually have a clause requiring you to retain the original copyright notice to prevent you (illegally) claiming copyright over the code.

        1. Nathanael

          Yeah. Stripping copyright and license notices is simply copyright infringment. Wilful in this case, so I think it’s $150,000 statutory damages per instance. Actually, since it’s wilful with the intent to deceive other Goldman Sachs employees, I think it’s a couple of other torts as well.

          And it’s criminal, but we know the DOJ doesn’t enforce the law against GS, so that doesn’t matter.

        2. fajensen

          Theft and Fraud becomes a habit after a while, then a succesful business model and then 20% of the economy.

          When I worked at Ericsson, we did send the OS source back through SUSE Linux. For two reasons:

          1) If you can get “your own” code for (f.ex.) high-speed failover or High-precision timers into the kernel, then the Linux community will take the burden on maintenance and maybe find bugs that our testers missed.

          2) It is easier and cheaper, logistics and legal-wise, to just license the complete software form SUSE rather than license the software and then bolt different revisions of kernel modules on top of it.

          3) There is no serious money to be made in selling the OS software, the customers buy embedded “functions in a box”, they will never pay for the OS software itself in any way or form!

          4) The developers are highly motivated to get their names on contributors lists for FOSS projects and presenting new things at conferences.

          So, “we” paid back – for selfish, business, reasons, but a good chunk of that Ericsson code is still out there (and possibly ripped off by GS).

          PS:
          GS should probably use FreeBSD instead. The BSD license allows “stealing” of the source code (copyright notices must remain, though) but … complying with *any* regulations would just not integrate well with GS’s Core Business Values, I guess.

    2. Brooklin Bridge

      Note that I made it sound too easy to get around the issue of contributing to open source projects when working for a company. It can be done, but it remains a real problem. What I should have stressed, is that it is not just Goldman Sachs or even the financial sector that is at fault. Private enterprise and open source is like poison laced alcohol on the one side and water brought to a thirsty soul on the other. They don’t mix well but are being mixed all the time and yes it’s amazing how much effort and expense big business avoids by use of open source.

  8. PaulArt

    As a programmer in real life I found this article and the Michael Lewis article in Vanity Fair interesting but pointless. I am an rabid Lewis fan by the way. What Goldman did is not very different from what most other HiTech behemoths do when they find that you, a valuable employee who has contributed to their bottom lines with lots of intellectual property decide to jump ship. They usually sue you or threaten to sue you and the company you are planning to jump to. It started a long time back in Silicon Valley. Corporations today do whatever they want. They can sue your grandmother if you showed her your company identity card. We live in a fascist state. What is an outrage is that HFT exists at all, not that some talented programmers are running around getting thrown in jail or that GS put them there. There was a very very good Planet Money NPR segment that went into HFT in great detail. In the last decade companies have spent more and more money shortening the signal travel time between their trading computers and the computers on the exchanges. It is INSANE that this is considered legal and it is even more INSANE that somehow all this HFT BS is supposed to be adding some sort of value to Society? God’s work? Greed is a Banker’s occupational hazard, a doppelganger every minute of his life. This was the disease that Walter Wriston and Sandy Weil had. Day after day you lend money and see talented entrepreneurs use labor and ingenuity to transform paper money into actual material wealth and intellectual property and pretty soon you think you can do it yourself and that you need to be given a BIGGER share of the profits and the pie. From there to Casino Capitalism is a short jump. A Final Solution for diseased Bankers is a consummation devoutly to be wished.

    1. Leviathan

      Right you are. This is a new/old form of servitude. Is it coincidence, I wonder, that so many of these serfs are foreign-born?

      Making Aleynikov into a martyr is not a great strategy for Lewis. It does raise great questions, though. Like just why the Feds keep leaping to attention whenever GS whistles, and quite openly do Wall Street’s bidding. If there is no political blowback for this behavior it will continue.

    2. Brooklin Bridge

      A Final Solution for diseased Bankers is a consummation devoutly to be wished.

      Being hauled through the eye of a needle would work…

  9. John

    As to GS not giving back to open source and the NSA doing do, I suggest a review of Garrett Hardin’s ‘Tragedy of the Commons’.
    The GS case is simply one of resource depletion, whereas, I feel certain that the NSA is doing it to somehow poison the community well.

    1. Lambert Strether Post author

      IIRC, Hardin’s “Tragedy of the Commons” is a way of diverting attention from the enclosure movement. Hardin’s tragedy only happens after the commons system (and its users) was stressed beyond endurance by private landholders grabbing bits of it and fencing them in.

  10. Brooklin Bridge

    Never had occasion to look into the legal aspects, but if I was organizing an open source project, I would definitely look into prohibiting usage outright by any company that was over a certain size. Not sure how that would be defined, perhaps the way they determine employer participation in fascist health care insurance, but I’d still give it a try

    1. PaulArt

      At first when I read that part about GS stealing from Open Source and making it their own I went WTF? Because programmers in tech companies beat themselves black and blue trying to get around this stipulation of sharing your code changes with the rest of the community. It is too burdensome and in 9/10 cases we end up never using the code because it is simply too much trouble to maintain this piece of code. There is an ethical consideration that you support someone else who may try to use this code with your changes. That is the whole point of Open Source – its a community effort for everyone’s benefit. Once upon a time the Open Source community had muscle and went after companies that stole code and tried to patent or make it their own. One wonders what happened. I would have thought really clever Open Source programmers outisde US would seed poison pills into the parts of code GS and other Wall Street companies steal so that it blows up in their faces. Now that would be grand fun.

      1. Brooklin Bridge

        @PaulArt, really good description. I guess the amazing thing here is how financial companies like GS simply assume they can get away with anything. Taking ownership of an open source package is like raiding a charity fund or grabbing old ladies purses so you can slosh on yet more bonuses for your executives, scummy at best. And that doesn’t even touch upon suing ex employees for their good works.

        Up until about 10 years ago it was unusual for a company to actually do that except in cases threatening to the core product, and I’m not certain it’s that frequent even now outside of the financial sector. But then they (the financial giants) ARE really really out of control and they know damn well there are NO consequences for anything they do.

      2. cj51

        While Goldman Sachs attitude is extreamly anti-social, I do not think you understand the GPL.
        “Once upon a time the Open Source community had muscle and went after companies that stole code and tried to patent or make it their own.”
        The FSF still investigates violations of the GPL.
        A company can’t steal something that is free.
        Goldman didn’t try to patent anything Aleynikov wrote.
        Goldman’s copy of the open source code IS their own if they keep it all to themselves.
        The GPL does not require Goldman to reveal any changes they make to the copy of the open source code they downloaded.

        That said, the punishment Aleynikov received is clearly excessive. He needs a new lawyer. Seems like they underestimated who they were dealing with. Sach’s nick name is not “Vampire Squid” for nothing. I do not understand how GS proved material damages.
        I have not seen an explanation yet for why Aleynikov copied the code. He had NO idea what might happen? Companies like GS are like “Aliens”, no conscience, no remorse. They try to kill everything in their way. Aleynikov was oblivious to this? I guess there is different kinds of smarts.

        1. Brooklin Bridge

          You raise a good point about Goldman being an end user and therefore being able to do what they want with the binary since they are not re-selling it, but a couple of points. First, no open source is exactly free. You agree to the contract or you can’t use the code and that restriction is something you never own which means you are never fully the owner. I’m not a lawyer and it’s been a long time since I read one of those contracts, but I think it states that you are not allowed to remove any references to the open source originators even on your own not-for-sale copy. And even on you “own” copy, you are still subject to the restriction of re-selling (again something you don’t own). If they were not trying to patent the code or claim outright illegal ownership, if no one else was ever intended to see the code, why would they overlay their own name, Goldman Sachs, over that of the open source authors? I’m assuming that after overlaying their name, they re-compiled and produced a new binary. Second, I seem to remember that if you use the binary as an end user you can modify it’s functionality, but not if there is another end user paying you and it’s arguable that the clients of Goldman Sachs would be considered the ultimate end user since they are paying for the result and thus in a sense Goldman is re-selling the binary to them for any given transaction they directly benefit from. It’s not Goldman that gets the gain, it’s their clients and then Goldman gets a commission. If so, that would open up the can of worms as far as legal modification of the binary and subsequent re-sale without making source available. I realize this is very speculative and I don’t feel like diving down into one of those things so I really don’t know.

        2. Nathanael

          There are several open-source licenses. (Google “Open Source Initiative” for one list.)

          Every last one of them requires that Goldman Sachs retain the original copyright notices and license text on *all* copies. Every last one.

          Goldman Sachs committed multiple cases of copyright infrignment for profit, and could probably be nailed to the wall for it.

  11. c1ue

    There’s a missing addendum to Mr. Sethi’s conclusion: if short term prediction of the future is so lucrative, then you’ve now increased incentives both to create the future via direct manipulation as well as magnified the rewards associated with insider trading.

    I also think Mr. Sethi might have gone a bit further in examining how HFT activity pretty much guarantees flash crashes because their activity in sum becomes a literal game of financial crack the whip.

  12. Jeremy Grimm

    The persecution of Aleynikov raises three extremely troubling aspects of our present society.

    Law should guide justice. The ‘law is the law’ tautology seems to have pushed aside the notions that justice must consider motive, intent, harm done and numerous other unquantifiable values to arrive at guilt and determine a just punishment. Justice does not begin in court. Our prosecutors should be agents of justice, not self-serving careerists marking convictions like points in a game. Aleynikov should never have been arrested, once arrested a judge on hearing the matter should have tossed the case out of court. Once the case came to trial, it sounds as if Aleynikov should have been found guilty of the crimes alleged. His just punishment should be a half-hearted admonishment, a written apology from the prosecutor and direction to have his arrest and conviction expunged from his record. The arrest, loss of time and money, and damage to his piece of mind would much more than deter him from treating Corporate power with such lack of regard – which more than serves Goldman’s desire to make him toe the line on their efforts to stifle his leaving them and the larger efforts of Corporations to stifle and hold back innovation. Instead, we have the legal system serving a bizarrely sadistic ritual that ends up costing the public enormous sums of money and does little to serve the best interests of anyone involved.

    We are inundated with claims that America is the ‘innovation nation’ and we must innovate to get our economy back on the road to prosperity. We are told that the well of innovation and progress in science is drying up. We’ve told that too few American young people pursue studies in the sciences, so the new immigration bill that recently left the Senate for consideration by the House roughly doubles the quota for H1-B Visas adds H1-B preferences for foreign students graduating from our schools with bachelor’s degrees and higher degrees in the sciences and engineering. The firm I work for has an agreement like the one that Aleynikov had with Goldman, only my firm claims all intellectual property which I might create on my time or theirs, whether related to my work or not. If they could, I believe they would lay claim to my sleeping dreams. I was not hired to invent or create. I’m just another body the firm places in a job. In return I receive not quite half of the income billed to our clients, a health and dental plan that’s not great but OK – much better than Obamacare, and a very modest degree of job security – they will give me a couple of weeks before termination instead of putting my stuff in a box and walking me to the exit. These intellectual property agreements are not intended to nor written to protect any real interests of the firm. The arrangement to pay $1 to inventors for inventions they create while working, are hardly an incentive for innovation. The claim my firm makes on all intellectual property I create is intended to control my speech and writings while on and off the clock – hardly intended to stimulate my creativity or free thought.

    The patent system and copyright systems have been twisted to control and stifle innovation and creativity. Our public school system works toward the same end to destroy native interests and channel thoughts. Those few that through miracle retain enough curiosity to pursue an interest rather than a job certification are clamped into a system of research contracts toward directed goals or wrapped in corporate constraints on their time, thoughts and rights to their own creation. … This topic has more depth than I could hope to penetrate with my tirade. I’ll finish with a quote that strikes home: “If you make the coalition, my usefulness as an inventor is gone. My services wouldn’t be worth a penny. I can only invent under powerful incentive. No competition means no invention.” – Thomas Edison, to a moneyman who helped J.P. Morgan take over Edison Electric and Westinghouse to build General Electric, — found in “Cornered” by Barry Lynn. Edison invented no more after that.

    Finally, why is a programmer of the Aleynikov’s caliber working for Goldman? I heard a lecture where the speaker claimed that over half of a recent class graduating from Princeton went into finance on Wall Street. Why are so many of our scientists and engineers working for our government to build ‘defense’ systems and systems of mass control like the NSA data collection? Why are our researchers working on contract research designed to support private corporate interests or to support our Military Industrial complex? We live in a country where all that we claim to value, all that we claim to believe as Americans has been cast aside and replaced with such abomination. This is the time when we must direct all our resources and energies toward solving or more probably mitigating great tragedies for our world, tragedies looming ever nearer on our horizon.

    1. Brooklin Bridge

      I think your last paragraph raises some incredibly good questions. Why indeed? It’s gotta be money and prestiege though lord knows how scum such as Goldman Sachs can project “prestiege” as part of working for them. And this suit can hardly further such a case.

  13. kievite

    My impression is that Aleynikov’s case is more complex then Lewis is trying to present. I fully agree with Leviathan that “Making Aleynikov into a martyr is not a great strategy for Lewis”. I would add it is an unconvincing strategy as it is clear tat in this case both sides were villains so to speak. To a different degree of course with Vampire Squid being as close to an organized crime (aka mafia) as one can get. So to me this looks like an attempt to make even of with a defecting member of the gang.

    And elements of greed in Aleynikov were present and probably provable to jury. So painting his a genially uninterested in HFT is a stretch,

    After all this guy did not went to work to the university after GS. He went into the company which almost tripled his salary. Teza [the new high-frequency-trading firm for which Serge left Goldman] was a direct competitor of Goldman in HFT space and was genially interested in getting as much from a new employee as they can. This is why I do not buy the statement:

    > Aleynikov was hired to speed up Goldman’s systems,
    > but he was largely unaware of (and seemed genuinely
    > uninterested in) the details of their trading strategies

    It contradicts his behavior in jail — for some reason he continued to develop HFT algorithms:
    > A few months into Serge’s jail term Masha received a
    > thick envelope from him. It contained roughly a hundred
    > pages covered on both sides in Serge’s meticulous eight-point script.
    >It was computer code—a solution to some high-frequency-trading
    > problem. Serge was afraid if the guards found it they
    > would deem it suspicious, and confiscate it.

    At the same time it is extremely funny that the only employee of Goldman Sachs to go to jail in the aftermath of the financial crisis was Aleynikov.

  14. Nathanael

    “(At Serge’s trial Kevin Marino, his lawyer, flashed two pages of computer code: the original, with its open-source license on top, and a replica, with the open-source license stripped off and replaced by the Goldman Sachs license.)”

    So Goldman violated copyright law. Given how draconian copyright law is, we could probably get GS shut down entirely for this. Harness the power of the open source movement with the power of the anti-banker movement….

  15. Otter

    From Lewis’ third last paragraph : ”Marino called the D.A.’s office. “They told me that they didn’t need him to be punished anymore, but they did need him to be held accountable,” says Marino. “They want him to plead guilty and let him go on time served.”.

    As in the case of Aaron Swartz, neither the putative criminal nor the putative victim is relevant. They want to record a legal precedent.

Comments are closed.