Was Goldman’s trading software stolen?

July 5, 2009

Matthew Goldstein–Matthew Goldstein is a Reuters columnist. The views expressed are his own.–

Did someone try to steal Goldman Sachs’ secret sauce?

While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution.

Authorities did not identify the firm, but sources say the institution is none other than Goldman Sachs .

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman’s automated stock and commodities trading business.

Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.

The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.

The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The charges also raise serious questions about the safeguards that Wall Street firms deploy to protect these costly-to-build proprietary trading systems.

The criminal case began to unfold on the evening of July 3, when Aleynikov was arrested by FBI agents at Newark Airport after returning from Chicago.

Aleynikov apparently had just started a job with another big firm in Chicago after leaving his previous employer in New York in early June. It appears that the financial institution allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.

On July 4, Aleynikov was processed on a “theft of trade secrets charge” in a criminal complaint. As of Sunday morning, he was still being held at the Metropolitan Correction Center in Brooklyn.

A Goldman spokesman declined to comment on the incident. A spokeswoman for the United States Attorney’s Office in Manhattan did not comment.

Sabrina Shroff, Aleynikov’s lawyer, says the facts will bear out that her client is innocent. She’s hoping he will be released from custody soon.

His wife, Elina, says her husband is innocent. Speaking in a phone interview from the couple’s New Jersey home, she says her husband worked hard for Goldman and has been a good citizen — noting he’s lived in the United States for 19 years. She seems mystified that federal authorities would arrest him on the eve of a holiday.

The Federal Bureau of Investigation, in charging Aleynikov, says he began working for the major financial institution in May 2007 as a computer programmer and left in early June. That matches the description of a man named Serge Aleynikov on the social networking site LinkedIn (the difference in spelling of the first name could not be immediately explained).

The biographical information for Aleynikov on LinkedIn says he joined Goldman in May 2007 and was vice president for equity strategy. The bio says he was responsible for “development of a distributed real-time co-located high-frequency trading platform.”

The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms.

Goldman was often at the top of the chart — far ahead of its competitors. It’s possible Goldman had asked the NYSE to stop reporting the number after it discovered that someone may have infiltrated the proprietary computer codes it uses.

Here’s the way the criminal complaint describes the Goldman trading platform:

“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.”

Federal authorities appear to believe Aleynikov may have had help. The German website that Aleynikov is accused of uploading the stolen information to is registered to a person in London.

While the case is still unfolding, there is more information to unearth about Aleynikov. For instance, it appears he and his wife are competitive ballroom dancers — there are videos of them on YouTube.com.

Many questions remain.

Which Chicago firm hired Aleynikov? The job he took in Chicago, according to the criminal complaint, paid nearly three times more than his $400,000 salary at Goldman.

Also, there’s more to learn about anyone who might have been helping him and the fallout the case may have for Goldman. When he was arrested, Aleynikov told the FBI he “only intended to collect ‘open source’ files on which he had worked, but later realized that he had obtained more files than he intended.”

Quick, get this guy a good lawyer.

One question investors need to ask is whether this incident will have any impact on Goldman’s second-quarter earnings. The alleged wrongdoing by Aleynikov took place at the beginning of June — although it’s not clear if it had any material impact on automated trading.

33 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Very regrettable incident which highlights the need for employers to do than adequate background checks on employees and to continue to monitor them “on-the-job.”

Posted by Marc | Report as abusive

Just how far will this tidal wave of greed go before it destroys all confidence in our financial system. When will the corporate executives be held accountable for creating a monster and for manipulating the market. Do you think that most of the other banks are not running up stocks and commodities for their own gain. I think we need in independent gaming commission rather than the SEC.

Posted by f belz | Report as abusive

Brilliant scoop! Breaking news and breaking views at Reuters. This has the potential to be one of the most important finance stories of the year.

Posted by Celia Kent | Report as abusive

Actually I’ve wondered for some time if GS wasn’t a proxy for the US government acting in capacity as market stabilizer and of course on their own behalf.

They are so large; this is not good, any way one looks at it.

Posted by Penny K | Report as abusive

This is really not a trading scandal. Reuters is making a mountain out of a molehill. Mark Goldstein needs to learn more about the business first before he writes articles.

The problem with automated (Algo) trading/execution is that firms are routinely trying to hire each other’s talent to get an edge.

At the major investment banks, sales people or traders who can come and go as they please. Its not unusual for entire teams to be “poached” by a competitor. However, the Algo guys are more like working for IBM/Sun and fall under the “intellectual property” or trade secret catagory. Hence they tend to be sued, arrested or have non-compete clauses in their contracts.

Posted by Peter | Report as abusive

The real question is did Goldman Sachs by virtue of preferntial trading treatment have an advantage over other market equity traders? If so why did the NYSE assist to the disadvantage of others trading in the market? Do the automated trades get excuted ahead of other trades? If so why? I think that Godman Sachs and the NYSE may have worked together to disadvantage smaller traders. If so each should divest the profits that they have made over the years as a penalty. It is not a free market when largess disadvantages the rest.

Posted by Thomas E Shafovaloff | Report as abusive

The accused must have an inside connection. He has to know what he is looking for, how to get it and where to get it from. I would think that every trading house must have similar software, which must surely be useful only to another trading house.

The trading effectiveness of the algorithms is a secondary issue. If the code had been successfully stolen, it would be possible to determine how Goldman Sachs would respond to different market conditions. So the code enables the user to front-run Goldman Sachs. Therefore stealing the code while illegal is rational and logical.

Algorithmic trading loses its effectiveness over time as the behavior becomes patterned and therefore predictable. It is like the body developing an immunity to a disease. This is one of the reasons why traditional technical trading is conceptually invalid.

Posted by Don | Report as abusive

Why is the FBI protecting the name of The Financial Institution?

Posted by Carl | Report as abusive

I am wondering how many Sergey Aleynikov’s there are in NJ as there seems to some one of the same name working with John Wiley & Sons that has a rich connection with the University of Chicago. Here’s a stat for ya:

http://manip.crhc.uiuc.edu/Wah/papers/BE 04/BE04_vol1.pdf

this is just the beginning, there is more to this, follow the money and you find the real story and it has a lot more to do with it than money.

Money is the root of all evil…and there is something more sinster going on here.

Swine flu shows up in Mexico just before “O” shows up, now a Russian scandal hitting right before “O’s” trip to Russia.

Biden and Powell both announcing that it will not be 6 mths and “O” will be tested. The 6 mths is about up.

You are the reporters, you connect the dots. As for me, I have enough evidence to be able to smell a rat, and a real stinky one at that.

Posted by Ann | Report as abusive

I feel that Goldman must laugh at their own clients behind closed doors while they use their best trading systems for their own principal account.

Posted by Holly | Report as abusive

Funny how when computerized trading and other gimmicks trashed the entire economy, big unk only arrested two pyramids scheme operators, but jumped in to throw money at the people whose gimmicks did the damage…but let one of them have their “trade secrets” (i.e. ability to make a quick buck based on nothing faster than the other guy) stolen, and the feds are right on the case.

If the people pulling these idiotic and destructive schemes over the past um…thirty years(?) hid behind guns like the mafia (instead of their own insiders in the government bouncing back and forth between corporado and gov jobs pretending to be “regulators” and “central bankers”), or worse…sold drugs…the RICO act would have stripped them all bare and landed them in prison.

Enforce the law as it stands, and stop deciding which of the thieves end up being counted as “victims”. So what if a big firm is out some of the millions it would have “earned” (term used loosely). The money they’ve cost not only Americans now, but our standing for generations to come makes their concerns meaningless.

Don’t protect their ability to digitally rape the economy…outlaw and prosecute the practice.

Posted by Brian Foulkrod | Report as abusive

its time to bring down the evil empire.

Current issue of “Rolling Stone” features an article about Goldman Sachs that every adult American should read and contemplate.

Posted by Dale Jeffers | Report as abusive

The following paper talks about similar threats exploited by hackers ..

http://www.irmplc.com/downloads/whitepap ers/Risky_Business-Hacking_The_Trading_F loor.pdf

Posted by GC | Report as abusive

I don’t understand any of this. What’s an algo trading?

Posted by Mick Sergeant | Report as abusive

Sounds like the man is being made an escape goat. Exactly what needs an escape goat will become clear in the weeks to come.

Posted by mohammad reza | Report as abusive

This is 2009. Any company who wants to develop better ways of making money in legal ways should be able to do so. It’s not “down with the monster.” It should be “up with innovation.” Goldman has a tendency to hire very bright people–good for them. It’s just the standard “down with the best.” Same thing has happened to Microsoft (arguably the best most successful software co.), Google (top search giant, cutting edge innovator), etc. Were this any other firm, it would be a shame, as well. It’s a shame that someone/some firm may have hired this crook to steal these proprietary trading secrets. Is that realy the only way that others can compete? Come on. Why don’t people try to apply their mind to their goals instead of trying to steal the ideas of others? It’s like cheating in high school all over again.

Posted by SK | Report as abusive

Money IS NOT the root of all evil–but the LOVE OF MONEY is. How one uses money can be good or evil.

Posted by JANE | Report as abusive

Interesting how the price of a barrel of oil has dropped in the same time spectrum that these codes were exposed. Any correlation?

Posted by michael tomaselli | Report as abusive

READ NO MORE, COMMENT NO MORE; MEDITATE ON COMMENT POSTED ON July 5th, 2009 9:28 pm GMT, posted by:Thomas E. S.; and do us some justice.

All this time I thought GS’s ‘Secret Sauce’ was being in bed with the US Federal Government.

Posted by Steve in Austin | Report as abusive

I wonder if the SEC checked this code to see if it doesn’t manipulate the markets – for example, when it says it uses huge volumes, this is clearly it for me!

It is described as a system that quickly reacts to news, but there is no free lunch like that out there. This system is here to destabilze the markets, the small investors who are naive enough to think that equity markets are a synonym to investment rather to gambling.

Why intelligent people at GS don’t have enough intelligence to see that with such secret codes, they are going to kill capitalism? They don’t care, as long as they can buy their villas before it!

From a common wealth point of view, having many such trading systems could have 2 consequences:
1) optimistic case: making markets more efficient
2) pessimistic case: making things uncontrollable and someday the whold system will eventually crash down

The value of our markets is in the hands of robots and artificial intelligence… does this sound reassuring to you?? This is such a nonsense, that if we can such a nonsense, we will anyway crash someday, no matter how.

Good luck everybody.

Posted by Ricardo | Report as abusive

What Goldman does is not illegal; however, it does manipulate the market: same as insider trading. In that respect, it should be outlawed. So, has thief number one robbed thief number two? The real victims are the public investors who get swamped by the Goldman (and others) massive buys and sells which are not based on public mutualy perceived stock values, but only on a computer code’s calculated price.

Posted by OldDad | Report as abusive

I see that you guys have made up your minds about the case!!!
Hopefully the real judge of the case will not do the same!!!

Posted by Elie | Report as abusive

While it’s no question that if he crossed the line, he should go to jail, I must say that there is always other side to a story like this.

I did some very good work for one of my previous employer. Even though it was done as a pet project in my spare time, I did it while working for this company, on their equipment, and so when I lost my job, it became company property. I never got any returns out of it. The company is making money from my creativity, my extra efforts and my hardwork.

Yes, there is a law that says if it is done on company equipment it belongs to the company. But equipment is not the only thing that goes into making something creative, something intellectual.

So if he did all this work, and if suddenly Goldman wants to hand him a pink slip, then I do feel sympathy for him. I have first hand experienced that law is grossly unfair in cases like this. While I would not break the law myself, I just think he is not as evil as it sounds here.

It’s funny how the author of the article immediately highlighted the fact that he is an immigrant, as if that automatically says something about him committing a crime. The beginning of the article stinks as biased.

Posted by John Smith | Report as abusive

I don’t understand why would his being Russian immirgants has any importance to the events, when he is already citizen
Also most banks are very advance in updated their computer systems, almost every other week, there will be changes to the existing systems
so what are the importance of some very old codes?
Anyway I must be sending my resume to the wrong places all these years because I make so little in comparsion to him

Posted by anonymous | Report as abusive

Again, as Dale Jeffers posted above, every American
needs to read the Rolling Stone’s article on Goldman
Sachs….you will never view GS the same afterward,
and if you have any sense, will start writing your
representatives about criminal investigations, if you
can find one that has not already been corrupted by
GS contributions. This is major, and I think many of
the comments above are hitting on the crux of the matter…
this case is a small tip of the iceberg, and this Russian guy may be the sacrificial lamb. Go here http://www.rollingstone.com/politics/sto ry/28816321/the_great_american_bubble_ma chine/print

Posted by Harvey | Report as abusive

Too bad no one analyzed the Goldman Sachs programs. These may be the programs that the firm uses to manipulate markets with money provided by the Federal Reserve Slush Fund.

Posted by JohnMD | Report as abusive

I do high frequency trading :).
We all learn while we move from one employer to another. This is called experience. Stealing algorithmic trading software makes no sense to me. Algorithmic trading systems are very complex, closely tight to bunch of proprietary hardware and software infrastructure. They cannot be copied around as pirate copy of MS Office. Once in awhile, people bring pieces of code from previous employers for personal advantage. They look great when complete huge project in no-time. Big firms like ‘Big Chicago Firm’ cannot afford damage associated with usage of stolen software. They often poke employees from competitors to benefit from ideas but not from stolen software.
If guy had stolen code he must go to jail. But I afraid that GS uses this case as excuse to put ground work to prevent employees to go to another firms.

Posted by Sergey (!= Aleynikov) | Report as abusive

What goes around. comes around. Even Goldman has to reap the harvest of what they sew. I have no sympathy. Everyone should read Matt Taibbi’s investigative report in the 6-23-09 issue of Rolling Stone.

Posted by Anubis | Report as abusive

I just wondering why this topic become magnet for so many self promoting posts with links to garbage outside Reuters.

Between us financial professionals:)

1. Stealing and selling trading system to foreigner company doesn’t make sense. As I post before, trading systems are very specialized to particular bank. Even quantitative part that does decision making cannot be simply carried away. Adaptation of such piece requires join effort of several highly skilled quants and quantitative programmers. They cannot tune up system without detail knowledge of math behind. But with such knowledge they can write it from scratch.

2. GS former employees keep many poverful position in gov.
GS is presumed to be the best investment bank. GS on resume gives huge competitive advantage. We all like hire people with best resumes.

3. GS/Pulson kill Lehman.
Lehman had leverage 30-to-1 with small cash reserves. GS had between 18 and 21 to 1. MS had 22-25 to 1.
Couple days before Lehman was gone, on a trading floor I heard ‘DB stopped taking Lehman as collateral. ALL trades with Lehman must be settled only in-cash’. That will kill any investment bank in couple days.

4. GS orchestrated gov bail out.
AFAIK GS and MS were reluctant to convert to bank holding company. Because bank holding companies are subject to very different regulations. Including much lover leverage ratio.

Posted by Sergey (!= Aleynikov) | Report as abusive

If loss of this software is feared for its potential to manipulate the stock market, how has Goldman Sachs been using it. Read “The Losing Game: Why You Can’t Beat Wall Street by T.E. Scott and Stephen Edds.

Posted by James Burkhardt | Report as abusive

I have observed that of all types of insurance, health insurance is the most controversial because of the issue between the insurance coverage company’s necessity to remain adrift and the user’s need to have insurance policies. Insurance companies’ commission rates on wellbeing plans are extremely low, therefore some companies struggle to profit. Thanks for the thoughts you talk about through this blog.