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Courtesy of Karl Denninger at The Market Ticker
Back-up: This week’s NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe’s bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
What? Was NYSE/Euronext suddenly "asked" to remove Goldman from the prop trading reports? Or is something else going on, as Zerohedge and Reuters apparently have managed to scoop:
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 that 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.
Oh this is bad for Goldman if true.
It’s even worse for the NYSE however, as Reuters goes on to explain:
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.
And yet here’s the problem – there’s a SEC issue here, in that this most certainly is a material issue related to the firm’s prospects and thus under the rules is supposed to be disseminated, at minimum when the request was made to the NYSE to suspend their reporting – if the request was made.
The next obvious question is "who was the firm in Chicago that this guy was going over to work for?"
This is pretty amazing stuff folks.
Industrial espionage is nothing new of course. Firms try to "hire away" important employees all the time, and frequently what they want is what’s in someone’s brain – employment agreement be damned. There is often years of litigation that comes out of this; as can be imagined its damn hard to own someone’s head or the contents thereof, at least in a way you can defend in court. Limited non-competes and such are routinely upheld but often the damage is done by the time the suit is filed.
What’s more-clear is when someone makes off with software, a customer list or otherwise clearly-identifyable work product that can be traced to its owners. That’s blatantly unlawful and yet it can be tremendously profitable – if you get away with it.
What’s surprising here is that the FBI got involved so quickly – or at all. These sorts of cases are almost always civil in nature; while there is nearly always a criminal offense embedded in there somewhere (computer tampering, transportation of stolen property, etc.) it is relatively rare for the FBI to give a damn.
Well give a damn they did this time, and the affidavit that Zerohedge has makes clear what they claim they’ve got this guy cold on – the "bash history" file they’re referring to is a Unix system log that the "shell", or command interpreter, automatically keeps. Said alleged offender apparently was aware of this file and tried to erase it after doing his deed, but was unaware that the system he was working on had auditing enabled (oops.)
The bad news for Goldman though is that if this code is now in the hands of who knows how many other people, what sort of fun could ensue by knowing how Goldman is analyzing the markets?
This could be kinda fun to watch…. from a distance, of course 🙂