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

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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 don’t even know how I finished up right here, however I assumed this post used to be great. I do not realize who you’re but certainly you are going to a well-known blogger when you aren’t already ;) Cheers!