Something Wicked This Way Comes - Goldman Sachs & Software

Zerohedge has been covering the Sergey Aleynikov story and some very strange details are emerging. It seems there is some proprietary code for high frequency trading which is amazingly profitable, as in too profitable.

From the Wall Street Journal:

In a commentary Thursday Iati offers some thoughts about how important algorithmic trading has become to the market. His conclusion hints at the significant power of the programmers.

“Electronic routing and execution has become the mechanism by which our capital markets operate. Algorithms account for more than 25% of all shares traded by the buy side today—a number steadily rising for several years now. However, the incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize. The familiar names of Lehman, Bear and Merrill are being replaced by less familiar ones like Wolverine, IMC and Getco.”

Iati notes that high-frequency trading firms include proprietary trading desks for a small number of major investment banks. Only 2% of the nation’s 20,000 trading firms in the U.S. markets, they account for 73% of all U.S. equity volume.

These funds are designed to “capture profit opportunities by being smarter and faster than the closest competition. They are, as a rule, secretive, stealthy, smart, and relatively unknown. The key to being smarter is their unique technology that enables them to profit on a number of these quantitative strategies, which they will protect at all costs.”

From A Goldman trading scandal?:

The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.

Now is Goldman Sachs trying to protect a now exposed backdoor method of intercepting trades and thus manipulating markets as some of the blogs are implying and speculating?

Well, I don't know frankly if GS or any of these hedge funds did something illegal. That said, any good engineer knows to analyze a problem in order to innovate the work around. What I can believe? Regulation has not kept up with technology which adds new meaning to the term loophole (pun intended for all software engineers reading this).

Obviously the smart thing to do here is regulate actual software design for financial systems and applications, what it can and cannot do in trading platforms. But that requires consulting the geeks, which is something D.C. never seems to want to do. Nope, instead of incorporating actual hard science into other policy areas, odds are we will simply get more breathing down the necks of every computer savvy person out there who managed to land one of these decent paying jobs.

Perhaps it is prudent to consider consulting some of our long time DARPA and NSA and other experts instead and put regulation into the software itself.

Previously I mentioned a strong need to regulate the derivatives' mathematical models themselves. Now we have this.

If any aspect of this breaking story is true and Goldman Sachs is simply using software to manipulate markets and trades...let's state the obvious: Geeks are not just for kicking around and trying to offshore outsource their jobs.

Update:

Bloomberg is catching onto this story. Again, note the black box of software architecture and the lack of technical expertise to determine what is going on exactly.

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Doomsday Machine.

Goldman Sachs has created a market manipulating machine. The cat is out the bag. According to prosecutors a copy of the software is still out there possibly in Germany.

Where are the screams for an investigation?

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write one here

I notice a pattern, from voting machines to software to bizarre financial "mathematical models", when one hits the more complex, Congress is deaf. I strongly suspect Congress itself has no clue as to how technology can be used or can grasp the details so these technical areas just get ignored.

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Web manager won't say if others saw Goldman code

From Reuters

 

Roopinder Singh, who runs file storage website xp-dev.com, told Reuters in London on Friday that computer files show whether or not the valuable code -- which U.S. prosecutors have charged former Goldman employee Sergey Aleynikov with stealing -- was viewed by others, but he declined to say what they show due to the scale of the case.

According to Singh, accounts at xp-dev.com initially have a privacy setting that only lets the user see them. However, users can change that setting to allow other people to view files.

 

 So, this blackbox code - which may be able to manipulate the markets could be open source now.

Yeah, can't see any problems there....

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Black boxes

In most markets, black boxes at times make up over half the volume. Goldman wasn't the only one to employ algos and such. Their mistake was to outsource the job, and look at what happened? In a way, its justice, because now everyone knows the colonel's recipe or soon will be. Something else regarding black boxes, at the end of the day they merely reflect what the firm's biases and such. The quants who come with it in each firm are different from the others. The only thing they have in common is to look for arbitrage moments, for example many stocks trade off more than one exchange and at times you could have discrepancies that only last a millisecond. McDonalds could be trading for 40/40.01 on the NYSE and 39.99/40 at the Chicago Stock Exchange (yes there is one) or some otc. The algo simply buys at the latter and sells at the former for that one penny, but in millions of shares.

The largest users of black boxes in recent years have actually been companies behind the Exchange Traded Funds (ETF). One of the largest group are the SPDRs, and each fund has to insure that the shares of the ETF correspond with the stocks in the S&P 500. Index funds also do this. Indeed, you may be surprised to find that your 401k money going into one of these things is utilizing a black box.

But these things aren't perfect either. Anyone remember Long-Term Capital Management? Part of their collapse had to do with their black box operations. There are others as well. Like I said, in cases where they believe their is a discrepancy in the price, is actually a reflection of their biases. Two years ago (I believe it was two), grain traders who normally took advantage of a known arbitrage moment when there was the closing of the old crop/new crop spread got killed when at the last moment news of a grain failure in Canadian Red Wheat (I think)aborted any chance of that arb moment.

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Regarding Goldman's other alleged actions

The one thing that has raised my eyebrows has been the alligation of front-running. This is illegal, and if they are doing that using their code, then the SEC and the Justice Department should slam the book on them. You see, its one thing to have a set of code that goes for arbitrage moments. But it is a totally different thing to implement arb-seeking algos in the same software you use to fulfill your market-making obligations.

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arbitrage moments

That also seems quite "not in the spirit of the game" and is preying on inferior "sync" and timing of multiple markets.

When I said "black box" what that means in engineering is no one knows what is inside.

So one can say "algorithm" but without seeing the code, one must really reverse engineer to find out what it's doing and that's by behavior, which is another area of engineering...to obfuscate any possibility of reserve engineering, i.e. cover your tracks.

So, since this is money really and since one has no idea what's going on inside the "black box" well, it's possible that market manipulation and even illegal activity is the algorithm itself.

Since GS runs the country, I mean who the hell is watching GS? We have this constant revolving door...people work in government almost as their standard sabbatical per corporate requirements.

LTCM was derivatives and that was more in the real of mathematical formulas vs. "code" and timing...but to me goes to these absurd CDOs based on Copulas.

I also wrote up quite a bit on how those mathematical models (which in turn can be implemented in software) were obviously not valid mathematically, so how it is if someone writes bullshit in math that is not a crime yet if they just take the money period that is? Just because it's in math doesn't make it less of a crime if it's in English?

At least regulated, someone somewhere needs to be reviewing these models and inspecting them, approving them before being allowed as "new innovative financial products". There are plenty of geeks out of a job, many of them could do just this sort of work.

But I mean this stuff is not investing, it's getting around the game with technology.

Imagine if Wall Street was Las Vegas in the 50's, these cats would have ended up either dead in shallow graves or beaten bloody and dumped out into the desert, i.e. get out of town.

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All comparisons to Las Vegas simply coincidental

"Imagine if Wall Street was Las Vegas in the 50's, these cats would have ended up either dead in shallow graves or beaten bloody and dumped out into the desert, i.e. get out of town."

At least one copy of this code was uploaded to a London server - and a former CFO from ABN Amro (Netherlands) is found dead from shotgun wounds to the head in southern England (police find nothing suspicious, of course), and a broker with Deutsche Bank AG, in London, is asked to take part in an IT-related investigation which may concern him as well, and falls to his death from a rooftop restaurant (police find nothing suspicious, of course).

Anyone remember all those bankster deaths surrounding BCCI way back when? Yup, nothing casino-like about Wall Street.

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More commentary on GS Frontrunning

DKos Diary Reverberates Throughout Wall St. (w/update)



I guess if "everybody" is doing it ... so much for the free market

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With Shapiro at SEC and Holder at DOJ - NO WAY!

With Mary Shapiro back again at SEC, and with Holder far too busy at Justice, filing briefs to defend the crimes and misdeeds on behalf of the Bush Administration - and to continue such misdeeds, I'm pretty certain we can count on nothing taking place from that direction.

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record profit for GS again - please read and comment

bid-ask spreads on CDSes will generate record profit for GS.

Anyone want to comment further on this one?

I'm just reading this thinking, WTF? You can make trades off of just the spread....when GS has an inside track to CDSes as it is?

I don't understand this well enough to analyze, so it's just raised by eyebrows but that's as far as I understand this article.

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spreads

Everyone, and I do mean everyone who tries to make a market in any instrument initially tries to make money off the spread. I've done it many times just on certain equity index futures and bonds. Trying to make money off the spread isn't the problem. The problem is if Goldman is front-running, that's the big no-no.

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...but

I thought GS owns a huge amount of the underlying CDSes themselves, through AIG...so how can someone own an asset and then also bet the spread on that? That's where I'm getting confused on this, plus what is the % of existing CDSes that GS already owns?

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Possibly....

Might have something to do with the combo of an unlimited number of CDSes can be written against one borrower or entity together with ICE US Trust doing the clearing house chores---ICE US Trust owned by Goldman Sachs, Morgan Stanley, UBS AG, Markit Group & ICE (InterContinental Exchange) and ICE US Trust, together with Markit Group, are supposed to be setting the official CDS valuations (got that headache yet?).

I believe GS is still rate as number four for CDSes/credit derives after JPM, Citi and BoA.

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Not just spreads - Infrastructure advantage

What has emerged in comments elsewhere is that HFT's reliance on microsecond advantages means the physical siting of some of the hardware itself gives an advantage. And the houses that handle these hardware setups require big $$$ to do so in proximity to the exchanges setup. This puts paid completely to any illusion of a 'free market' so beloved of the Golden Slacks ideologues and their like.

Facebook: Sergey Aleynikov Fan Club : http://flq.us/wg

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GS slated for record profits

Check this out, now GS is slated for record profits and this is so soon after this supposed "massive financial global meltdown" that would have ended the world as we know it. Uh huh!

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Before the record profits there was this:

Goldman Sachs Executives Sold $700 Million Of Stock

Most of the sales occurred while Goldman Sachs was a TARP recipient.

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