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Goldman Sachs Loses Grip On Its Doomsday Machine

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Goldman Sachs Loses Grip on Its Doomsday Machine

Never let it be said that the Justice Department can’t move quickly when it gets a hot tip about an alleged crime at a Wall Street bank. It does help, though, if the party doing the complaining is the bank itself, and not merely an aggrieved customer.

Another plus is if the bank tells the feds the security of the U.S. financial markets is at stake. This brings us to the strange tale of Goldman Sachs Group Inc. and Sergey Aleynikov.

Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.

It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.â€

How could somebody do this? The precise answer isn’t obvious -- we’re talking about a black-box trading system here. And Facciponti didn’t elaborate. You don’t need a Goldman Sachs doomsday machine to manipulate markets, of course. A false rumor expertly planted using an ordinary telephone often will do just fine. In any event, the judge rejected Facciponti’s argument that Aleynikov posed a danger to the community, and ruled he could go free on $750,000 bail. He was released July 6.

Market Manipulation

All this leaves us to wonder: Did Goldman really tell the government its high-speed, high-volume, algorithmic-trading program can be used to manipulate markets in unfair ways, as Facciponti said? And shouldn’t Goldman’s bosses be worried this revelation may cause lots of people to start hypothesizing aloud about whether Goldman itself might misuse this program?

Here’s some of what we do know. Aleynikov, a citizen of the U.S. and Russia, left his $400,000-a-year salary at Goldman for a chance to triple his pay at a start-up firm in Chicago co- founded by Misha Malyshev, a former Citadel Investment Group LLC trader. Malyshev, who oversaw high-frequency trading at Citadel, said his firm, Teza Technologies LLC, first learned about the alleged theft July 5 and suspended Aleynikov without pay.

‘Preposterous’ Charges

Aleynikov’s attorney, Sabrina Shroff, told the judge at the bail hearing that Aleynikov never intended to use the downloaded material “in any proprietary way†and that the government’s charges were “preposterous.â€

Goldman isn’t commenting publicly about any of this, though it seems the bank’s bosses want us to believe there’s no need to worry. On July 6, Dow Jones Newswires quoted a “person familiar with the matter†saying this: “The theft has had no impact on our clients and no impact on our business.†Note that this person was so familiar with Goldman that he or she spoke of Goldman’s clients as “our clients†and Goldman’s business as “our business.â€

By comparison, last Saturday, while most Americans were enjoying the Fourth of July holiday, Facciponti was in court warning of looming threats to Goldman and the financial markets.

“The copy in Germany is still out there,†the prosecutor said, according to an audio recording of the hearing. “And we at this time do not know who else has access to it and what’s going to happen to that software.â€

Secret Software

“We believe that if the defendant is at liberty, there is a substantial danger that he will obtain access to that software and send it on to whoever may need it,†Facciponti said. “And keep in mind, this is worth millions of dollars.â€

By “millions,†it’s unclear if that would be enough to match Goldman Chief Executive Lloyd Blankfein’s $70.3 million compensation package for 2007. Or perhaps millions means thousands of millions, otherwise known as billions.

Facciponti said the bank told the government that “they do not believe that any steps they can take would mitigate the danger of this program being released.†He added: “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.†All Aleynikov would need to get the code from the German server is maybe 10 minutes with a cell phone and an Internet connection, Facciponti said.

Judge’s Ruling

The hole in Facciponti’s argument was that the government offered no evidence that Aleynikov had tried to disseminate the software during the month prior to his arrest, after he downloaded it and had left his job at Goldman. That’s the main reason the judge, Kevin N. Fox, cited in ruling Aleynikov could be released on bail.

“We don’t deal with speculation when we come to court,†Fox said. “We deal with facts.â€

Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too. Oh yes, and could the bank be a bit more careful about safeguarding its trading programs from now on? Hopefully the government is asking the same questions already.

If you've read my posts over time here you would remember that I've been banging on about the trading algorithms used by the big brokerages and banks to establish favourable trends and expolit minute the arbitrage these manipulations create; with millions/billions/or more of transactions per second.

Like the article, I find it odd that Goldman would want the federalez to know of the esistence of this trading 'black box'. It's pretty obvious that the government wouldn't be able to make heads or tails of the code, as the guys who could properly destruct and analyse it are in the market and wouldn't want to indict themselves. It will be like a modern day minefield, very sophistocated, with a lot of false paths and redundancies.

Most likely this stuff is on the leading edge of sentient software, requiring almost no human intervention once initialized. Makes you wonder how much collusion between the players there are.

Ultimately, public knowledge of this stuff will kill off a lot of amatuer trading as the punters come to realize that the markets are totally rigged, and that only the big boys can make any headway and real money.

Edited by cashinmattress

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Goldman Sachs Loses Grip on Its Doomsday Machine

If you've read my posts over time here you would remember that I've been banging on about the trading algorithms used by the big brokerages and banks to establish favourable trends and expolit minute the arbitrage these manipulations create; with millions/billions/or more of transactions per second.

What is your background in this area?

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Goldman Sachs Loses Grip on Its Doomsday Machine

Ultimately, public knowledge of this stuff will kill off a lot of amatuer trading as the punters come to realize that the markets are totally rigged, and that only the big boys can make any headway and real money.

Agreed.

It pretty much kills of day traders, though long term stocking picking should still work.

Having had a play with some currency spread betting, you soon realise that these so called trading platform are nothing more than a games machine like roulette or any other - of course if the analogy of the casino then extended to the actual financial trading system you wonder why anyone would want to do business with the likes of Goldman Sachs.

Personally I wouldn't touch those boys with a barge pole, there are many better client focused organisations out there to work with than GS. A few years ago I did get to play a role in helping to evaluate which investment bank we'd use on a medium sized merger, and I can tell you who I put at the bottom of the pile - you want to count your fingers when dealing with those boys.

I would go as far as to say they are unprofessional in some of their behaviour, though in fact I expect they were being entirely professional at singularly trying to benefit GS at the expense of the client.

Edited by mikelivingstone

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What is your background in this area?

The return of the Grand Inquisitor.

I notice you didn't have any reposts to my later replies in this recent thread.

Well, none where you admit to your glaringly obvious gaffes, anyway. :D

Edited by Dave Spart

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Boring null hypothesis.

The trading software is interesting to about three other people on the planet and is pretty much the same as what dozens of other banks and financiers have access to using variations on much the same algorithms everyone else uses. That said it costs money to develop.

Its proprietary, GS are pissed off and put out an alarmist press release to whip the cops into action and to get themselves some publicity. Nobody wants unfair practices unless they are profiting from them...then its a different matter. GS have doomsday software capable of making vast amounts of money easily? Sign me up.

Next up: U2 claims pirated copies of their latest album could endanger the integrity of the time/space continuum.

Edited by Cogs

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All the people who keep posting Bloomberg stories on here should probably remember that Bloomberg columnists are by and large generalist journalists who don't actually know much about financial markets. It's not really a very good source for news.

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What is your background in this area?
The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.â€

So your saying the prosecutor is deliberately lying?

Why would they do that a defence attorney will destroy them, if the code could be used to manipulate the markets why wouldn't GS do it. If it can't why say it?

This sort of posturing could cost the prosecution the case, plus they may have to prove it can be used to manipulate the markets in an unfair way in court.

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So your saying the prosecutor is deliberately lying?

Why would they do that a defence attorney will destroy them, if the code could be used to manipulate the markets why wouldn't GS do it. If it can't why say it?

This sort of posturing could cost the prosecution the case, plus they may have to prove it can be used to manipulate the markets in an unfair way in court.

As someone said in the other (better) thread on the topic, the issue is that from the code, someone could work out how to reverse engineer how Goldman's trading algorithm works, and then use that knowledge to manipulate markets. It's not as sinister as you seem to think it is.

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As someone said in the other (better) thread on the topic, the issue is that from the code, someone could work out how to reverse engineer how Goldman's trading algorithm works, and then use that knowledge to manipulate markets. It's not as sinister as you seem to think it is.

So manipulating the markets isn't sinister?

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So this guy left GS to go to a start up which wants to specialise in the area that he had been working on.

It looks to me that he downloaded his work so that he didnt have to rewrite it all in the new firm. Technically speaking this is not legal as GS "owns" the program but, frankly, nothing unusual for a departing person to copy software/contacts/whatever. GS just dont want the competition to be running on their proprietary software. Understandable situation from both sides as far as I am concerned.

I really dont think there is a conspiracy here. But if it makes you happy, carry on. And buy some more tinned foods whilst you are at it.

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Agreed.

It pretty much kills of day traders, though long term stocking picking should still work.

Having had a play with some currency spread betting, you soon realise that these so called trading platform are nothing more than a games machine like roulette or any other - of course if the analogy of the casino then extended to the actual financial trading system you wonder why anyone would want to do business with the likes of Goldman Sachs.

Personally I wouldn't touch those boys with a barge pole, there are many better client focused organisations out there to work with than GS. A few years ago I did get to play a role in helping to evaluate which investment bank we'd use on a medium sized merger, and I can tell you who I put at the bottom of the pile - you want to count your fingers when dealing with those boys.

I would go as far as to say they are unprofessional in some of their behaviour, though in fact I expect they were being entirely professional at singularly trying to benefit GS at the expense of the client.

whilst i am by no means a daytrader (ive tried but i dont like it and my technique doesnt work over that time period) i dont see why it should lkill of trading in the slightest, ive been doing it based almost entirely using various forms of technical analysis for a good few years to make a pretty good living (through bull markets,bear markets and across all asset types) and it works at least as well today as it did when i started, any manipulation will still shows itself through technical analysis. The markets are always changing by their very nature and one just needs to adapt accordingly. This article is pretty much non news, those with the largest funds will always move the markets due to being the largest participants, its always been this way

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So this guy left GS to go to a start up which wants to specialise in the area that he had been working on.

It looks to me that he downloaded his work so that he didnt have to rewrite it all in the new firm. Technically speaking this is not legal as GS "owns" the program but, frankly, nothing unusual for a departing person to copy software/contacts/whatever. GS just dont want the competition to be running on their proprietary software. Understandable situation from both sides as far as I am concerned.

I really dont think there is a conspiracy here. But if it makes you happy, carry on. And buy some more tinned foods whilst you are at it.

This seems to be the most accurate assessment of this news item.

Those who have worked for GS in just this field can assure you all that the notion that their software is particularly sophisticated or superior to other market entities is preposterous. Due to the climate of bullying and backstabbing and years of outsourcing to India their software is quite average and their lead evaporated a few years ago.

They are getting all litigious for the simple reason that they don’t want that to become "common knowledge".

Goldmans maintain their position due to their "political and business" contacts not their trading strategies or software.

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Guest DissipatedYouthIsValuable

Goldman's evil time machine stole my baby.

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What is your background in this area?

Non existent, by the sound of it.

The OP doesn't understand the difference between gaming other participants' trading algorithms and manipulating the the market.

Just ignore him Noel, he has no idea what he's talking about.

Edited by VoteWithYourFeet

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If you've read my posts over time here you would remember that I've been banging on about the trading algorithms used by the big brokerages and banks to establish favourable trends and expolit minute the arbitrage these manipulations create; with millions/billions/or more of transactions per second.

Tobin/Transaction tax, anyone?

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All the people who keep posting Bloomberg stories on here should probably remember that Bloomberg columnists are by and large generalist journalists who don't actually know much about financial markets. It's not really a very good source for news.

Quite.

Just been talking to one of these journos, who found it quite amusing that we at HPC gave so much credence to Bloomberg, when, in essence, most of the journalists don't have any specialist knowledge at all.

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IMO this is just a spoiler by GS to try and put clients off leaving with the ex employee, by claiming he's a thief. Essentially, they don't want him starting his own business with some of their clients. It's all BS, as you can't stop competition without killing off competitiveness in a market place, so judge isn't likely to be impressed. People start up in competition everyday, and ex employers always try to stop them by claiming the ex employee was no good/not honest etc etc.

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Goldman Sachs Loses Grip on Its Doomsday Machine

If you've read my posts over time here you would remember that I've been banging on about the trading algorithms used by the big brokerages and banks to establish favourable trends and expolit minute the arbitrage these manipulations create; with millions/billions/or more of transactions per second.

Like the article, I find it odd that Goldman would want the federalez to know of the esistence of this trading 'black box'. It's pretty obvious that the government wouldn't be able to make heads or tails of the code, as the guys who could properly destruct and analyse it are in the market and wouldn't want to indict themselves. It will be like a modern day minefield, very sophistocated, with a lot of false paths and redundancies.

Most likely this stuff is on the leading edge of sentient software, requiring almost no human intervention once initialized. Makes you wonder how much collusion between the players there are.

Ultimately, public knowledge of this stuff will kill off a lot of amatuer trading as the punters come to realize that the markets are totally rigged, and that only the big boys can make any headway and real money.

Two words.

******.

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Quite.

Just been talking to one of these journos, who found it quite amusing that we at HPC gave so much credence to Bloomberg, when, in essence, most of the journalists don't have any specialist knowledge at all.

Like journalists everywhere else then.

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Guest DissipatedYouthIsValuable

This GS stuff is a lot duller than expected, no Satan's lair, nothing.

Just some whinging about intellectual property rights and a bit more rigging of the Casino.

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Boring null hypothesis.

The trading software is interesting to about three other people on the planet and is pretty much the same as what dozens of other banks and financiers have access to using variations on much the same algorithms everyone else uses. That said it costs money to develop.

I've also heard that it's an Excel spreadsheet. ;)

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