–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.
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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.
Interesting how the price of a barrel of oil has dropped in the same time spectrum that these codes were exposed. Any correlation?
Money IS NOT the root of all evil–but the LOVE OF MONEY is. How one uses money can be good or evil.
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.
Sounds like the man is being made an escape goat. Exactly what needs an escape goat will become clear in the weeks to come.
I don’t understand any of this. What’s an algo trading?
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
Current issue of “Rolling Stone” features an article about Goldman Sachs that every adult American should read and contemplate.
its time to bring down the evil empire.
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.
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.
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.
Why is the FBI protecting the name of The Financial Institution?
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.
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.
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.
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.
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.
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.
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.”