Tuesday, July 7, 2009

Insight Into How Damaging the Theft of Goldman Trading Secrets Might Be

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Serge Aleynikov’s alleged theft of Goldman Sachs trading secrets poses a risk to U.S. markets. Aleynikov transferred the code to a computer server in Germany, and others may have had access to it, Facciponti said.

“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,” Facciponti said, according to a recording of the hearing made public yesterday. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

Bloomberg reports:

“Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,” said Larry Tabb, founder of TABB Group, a financial-market research and advisory firm. “The more sophisticated market makers -- and Goldman is one of them -- spend significant amounts of money developing software that’s extremely fast and can analyze different execution strategies so they can be the first one to make a decision.”

Someone could use the code “to implement the same strategies and maybe on certain stocks they can be faster and, in effect, take away money that would normally be Goldman’s,” Tabb said in a phone interview. “The second thing that they can do is actually analyze the code so that they know what Goldman’s going to do before Goldman does it and kind of reverse engineer Goldman’s strategies and make money basically at the expense of Goldman.”
In other words, if that code is out there, Goldman's current trading strategies are destroyed.

6 comments:

  1. Maybe Goldman Sachs is just another LTCM. Just bigger, slower to inflate and not yet ready to pop. At least not until now.

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  2. Wenzel, don't be fooled. This is not what it appears to be. As one who knows the algo trade business well, I can assure you that the software driving their systems is secondary to server location. The algos matter but they are always being refined. What was gold yesterday is crap tomorrow.

    What can make an algo interesting is the ability to analyze inputs other than price. I will go on record, anonymously of course, and say that Goldman is probably fearful of having these non-price inputs disclosed to the world. Wouldn't it be interesting to see what non-price inputs Goldman has access to that the rest of the street can only wish for? And wouldn't it be interesting to see where tose inputs come from?

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  3. Amazing as it is, there has been no overt market manipulation in the FX market in about a week. About the time GS's troubles started. Odd that.

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  4. Wenzel,

    "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"

    So... isn't that an admission that GS could use it's own program to manipulate markets in unfair ways?

    Goldman needs to hire a lawyer that isn't so stupid as to incriminate his client...

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  5. "there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways"

    Does the fact that Goldman knows how to use it make them a danger to free markets?

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  6. @annonymous who wrote:

    Wenzel, don't be fooled. This is not what it appears to be. As one who knows the algo trade business well, I can assure you that the software driving their systems is secondary to server location. The algos matter but they are always being refined. What was gold yesterday is crap tomorrow.

    What can make an algo interesting is the ability to analyze inputs other than price. I will go on record, anonymously of course, and say that Goldman is probably fearful of having these non-price inputs disclosed to the world. Wouldn't it be interesting to see what non-price inputs Goldman has access to that the rest of the street can only wish for? And wouldn't it be interesting to see where those inputs come from?


    Your point is very accurate. Just what non-price inputs does Goldman have access to and what non-price inputs are they watching?

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