What Did Sergey Aleynikov Really Do At Goldman?

| July 14, 2009

money_burning.jpg

In interesting and complex story is unfolding, centered on Goldman Sachs, the large and highly profitable company that we all worked so hard to fund with bail out dollars. The story started as a small, throw-away technical story about a former Goldman employee named Sergey Aleynikov, who left the firm and was accused of taking source code with him. From a Reuters story on the subject from earlier this month:

That wealth is generated on computer systems that can handle greater trading volumes at ever increasing speeds. These platforms often rely on algorithms — a sequence of instructions used for calculation and data processing — that can spot unseen opportunities in the market and give their users a huge advantage measured in milliseconds.

Sergey created highly reactive real time trading code that likely was looking for “pockets of predictability” in the somewhat noisy sea of trades that happen every day. These are transient opportunities to make a small amount of money on trades that last for only a few moments to less than a day. On their own they are very small, but when orchestrated by high speed computer and constantly running, they can represent a substantial and steady stream of income for the firm or trader that is running them.

Where this starts to get strange is what Goldman did next, and how federal law enforcement became involved. This except from Zero Hedge:

Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago, on what are basically industrial espionage charges. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy.

In the 5 days immediately preceeding his departure from “Financial Institution” (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain’s affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner.

From the affidavit: “certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution’s ability to profit from the [code]’s speed and efficiency would be significantly diminished.”

Let me clarify – in the matter of a few days, Goldman Sachs was able to get federal law enforcement to arrest a programmer that had left its employ to work for one of its competitors. Those familiar with the workings of our justice system might be surprised at the speed at which this went from “we think he is up to no good” to “enjoy your jail cell, Serge”. Since when does the FBI take marching orders from Goldman Sachs?

This becomes important because in the present day program trading (under the control of machines running programs like this) account for as much as 49% of all trades on the NYSE, with Goldman’s programs taking up at least 60% of that volume according to Zero Hedge.

A few days later Bloomberg weighs in wanting to know just exactly what Goldman’s code was doing that could so manipulate the markets? The video says, “It is amazing within one day of Goldman calling they had FBI agents at his driveway doing surveillance. The next day they arrested him…”

Last but not least, in the tin foil hat area of this evoloving puzzle is a set of wild speculation that was posted first on the daily KOS and later re-cycled via Denninger’s market ticker, including such charges as:

…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.

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.

Which are very heavy charges indeed. There is something strange wrapped inside this story, and if we are all lucky it will emerge over time. With this now a legal matter, this may end up unfolding in a direction that powerful forces such as Goldman and the NYSE would rather not have it go. Within the court system, much of what Sergey knows in relationship to this matter is now discoverable and available to be cross examined. All it would take would be for some enterprising legal mind to start pulling this thread and a great many interesting facts may come to light.

We may find that our hard earned tax money that did not go to send us back to the moon instead went to help firms like Goldman Sachs further loot and launder what is left of our shattered economy, all the while keeping their government cronies on warm standby to beat down anyone who might spill the beans.

Be Sociable, Share!

Category: Economics, Information Technology, Main, Recession Watch, Stimulus

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

Comments are closed.