In the world of trading there is a scandal erupting. At first blanche, it was just another insider job. JPMay points to "Goldman: Pwned?". Snippets to get the general thrust. Firstly, GS drops off the trading reports:
This week's NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high ... but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
Matt Goldstein apparently led the story, reporting that they were inside-hacked, asking "Did someone try to steal Goldman Sachs' secret sauce?"
... a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from [Goldman Sachs].
So, the press made a lot about how this, but it is old news. For the techies reading today, here is how they said they 'got their man':
...the affidavit that Zerohedge has makes clear what they claim they've got this guy cold on - the "bash history" file they're referring to is a Unix system log that the "shell", or command interpreter, automatically keeps. Said alleged offender apparently was aware of this file and tried to erase it after doing his deed, but was unaware that the system he was working on had auditing enabled (oops.)
"Industrial espionage is nothing new of course." Nor is logging the activities of insiders :) This is a standard requirement imposed by audits, whether you like it or not, whether you can do it or not. However, the story grows bigger. This open comment lays it out:
...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.
The unbacked, unevidenced allegation in the popular blogs is this: the code that was stolen might be been the code that drove a system that "saw" others' trades before they could be executed. More technically, it is claimed:
The big ticket, the magic wand for a rogue quant shop is technology to grab off FIX PROTOCOL, OCX, or SWIFT messages that precede every transaction_commit at the Exchanges.
If true in fact, this is almost guaranteed to lead to front-running. That is, if Goldman Sachs has any such magic wand, they would need to be bona fide arch-angels to avoid the temptation to read the trades coming, and beat them into the market. We're not talking millions here, but billions, or as that blog claimed "The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day."
The structural details match: they are given special access for various reasons, and they are on the relevant security committees. Which is perversely backed by the actual claims of the bank:
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.”
Unlike most other claims written here, this has some degree of reliance. If the prosecutor said it, then, more or less, Goldman Sachs said it. And, the guy from Bloomberg asked the right question:
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.
If it is an honest trading system, it can't manipulate the market. Except by volume and sneaky trades and false rumours and so forth, but that is the market. As long as everyone is under the same rules, they are in the market. Goldman Sachs can only manipulate the market if it is in possession of information that others do not have.
The final word seems to go to thefinanser in the UK, which deliciously juxtaposed Goldman's responses to salacious gossip in a popular mag:
The story actually goes back to when Goldmans announced last week that they were fed up with rock mag, Rolling Stone, over a piece claiming that the bank had “engineered every major market manipulation since the Great Depression — and they’re about to do it again.”
Goldmans responded that it was “hysterical in both senses of the word” and that the magazine had “cobbled together every conspiracy theory ever written about us and injected some hyperbole and lots of bad language and called it a story.”
back to back with the prosecutor's filed statements before court:
The problem is that in their case against this guy, Sergey Aleynikov (a Russian immigrant no less, how James Bond is this getting?), the bank's lawyer made the statement that this “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, the program can be used to manipulate markets, can it?
Goldmans has virtually admitted as much, and no-one is going to let them off the hook.
In fact, GATA (the Gold Anti-Trust Committee) has already raised questions with “the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission to investigate the Goldman Sachs Group Inc. computer trading program that, according to a federal prosecutor, the bank acknowledges can be used to manipulate markets.”
What is perhaps worth underlining is that this last post is a credible bunch of insiders, not the rebels-with-a-blog. If the Financial Services Club are calling BS to GS, likely other insiders are too.
And well they should, if Goldman Sachs had an insider track on all the trades into NYSE. If this proves true, we're looking at an event that will make Arthur Andersen look like a Kindergarten squabble.Posted by iang at July 13, 2009 07:37 AM | TrackBack