Commentaries

What’s the frequency, SEC?

Sergey Aleynikov is not the Wall Street folk hero that some Goldman Sachs conspiracy theorists are making him out to be.

If Aleynikov stole some of the top secret code for Goldman’s automated, super-fast trading platform, as prosecutors contend, then he broke the law, and the 39-year-old former Goldman programmer should be appropriately punished.

But this strange Wall Street crime story isn’t just about one man’s guilt or innocence. The case should also serve as an alarm for securities regulators to start taking a close look at so-called high frequency trading and the impact that this speed-of-light trading strategy is having on the markets.

After all, if a computer code is valuable enough for someone to steal, and critical enough for a Wall Street firm to go to federal authorities to protect, one would think that regulators would want to know why it is so important.

Yet regulators largely have stood by and allowed this secretive corner of the quantitative trading world to grow ever bigger, without mustering up much of a protest.

Computer-driven trading, where complex buy and sell orders are completed in fractions of a second, now account for 73 percent of all daily stock trades in the United States, according to the Tabb Group, a financial services research firm. Tabb also estimates that the 300 securities firms and hedge funds that specialize in rapid-fire algorithmic trading raked in some $21 billion in profits last year.

Admittedly, the $21 billion figure is really just a best-guess estimate. The vast majority of hedge funds and trading firms that engage in high frequency trading — Citadel Investment Group, D.E. Shaw, Global Electronic Trading Company, Renaissance Technologies and Wolverine Trading — are private and don’t reveal much, if anything, about their operations. Even a public company like Goldman, an acknowledged leader in high frequency trading, is silent on the profits it generates.