Did someone try to steal Goldman Sachs secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institutionthat sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldmans automated stocks and commodities trading businesses. Federal authorities allege 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 apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow 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 federal charges also raise serious questions about the safeguards Wall Street firms deploy to protect their proprietary trading systems.
The criminal case began to unfold on the evening of July 3 when Aleynikov was arrested by FBI agents at Newark Liberty Airport, after returning from Chicago. Aleynikov had just started a job with another firm in Chicago, after leaving the big firm in NY in early June. It appears 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 that was filed in federal court in Manhattan. As of this afternoon, he was still being held in federal custody pending posting of bail.
A Goldman spokesman declined to comment on the incident. A spokeswoman for the US Attorney in the Southern District of New York didnt comment. Authorities reportedly took all the computers from Aleynikovs home in New Jersey.
Sabrina Shroff, Aleynikovs lawyer, says the facts will bear out that her client is innocent. Shes hoping he will be released from custody soon.
His wife, Elina, says her husband is innocent. Speaking in a phone interview from the couples New Jersey home, she says her husband worked hard for Goldman Sachs and has been a good citizennoting hes lived in the US for 19 years. She seems mystified that federal authorities would arrest him on the eve of a holiday.
The Federal Bureau of Investigations, 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 would appear to match the description of a man named Serge Aleynikov, as it is listed on the social networking website LinkedIn.
The bio 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. In his own words, he goes on to describe the platform as a very low latency (microseconds) event-driven market data processing, strategy and order submission engine.
The case against Aleynikov may explain why the New York Stock Exchange moved quickly in the past week to alter its methodology for reporting program stock trading. Goldman often was at the top of the chartfar ahead of its competitors.
On the week ending June 19, Goldman, for instance, was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didnt appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE announced it would change some of the data for calculating the trading report. The Zerohedge blog was all over this controversy a week ago.
And now Tyler Durden of ZeroHedge has come in with his own excellent analysis of this strange, strange criminal case. I highly recommend reading it.
Its possible Goldman asked the NYSE to alter some of its reporting methodology after the firm discovered that someone may have infiltrated the proprietary computer codes it uses.
Heres 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.
Meanwhile, federal authorities appear to believe Aleynikov, who has lived in the US for more than a dozen years but frequently travels back-and-forth to his native Russia, may have had help. The German website that Aleynikov allegedly uploaded the stolen information to is registered to a person in London. That, of course, gives rise to speculation about this all being a case of international espionage.
This case is quickly unfolding and theres plenty more information to unearth about Aleynikov. For instance, it appears that he and his wife are competitive ballroom dancersthere are some videos of them on youtube.com. The job he took in Chicago, according to the criminal complaint, paid nearly three times more than his $400,000 salary at Goldman.
Which Chicago firm hired Aleynikov? Inquiring minds want to know. But you can rule out the giant hedge fund conglomerate Citadel. Its not them.
Also theres more to learn about anyone who might have been helping him and the fallout this 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. But authorities say after he uploaded the files he encrypted them and erased the program he used to encrypt them.
Its not clear why the authorities and apparently Goldman waited so long to move on Aleynikov, even though they knew he had uploaded the information weeks ago.
One question investors need to ask is whether this incident will have any impact on Goldmans second-quarter earnings. The alleged wrongoing by Aleynikov took place at the beginning of the monthalthough its not clear if it had any material impact on automated trading.
Update: The NYSE has not stopped reported program trading results. Instead, its altered the method it uses for putting together that report.
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Did someone try to steal Goldman Sachs secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institutionthat sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldmans automated stocks and commodities trading businesses. Federal authorities allege 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 apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow 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 federal charges also raise serious questions about the safeguards Wall Street firms deploy to protect their proprietary trading systems.
The criminal case began to unfold on the evening of July 3 when Aleynikov was arrested by FBI agents at Newark Liberty Airport, after returning from Chicago. Aleynikov had just started a job with another firm in Chicago, after leaving the big firm in NY in early June. It appears 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 that was filed in federal court in Manhattan. As of this afternoon, he was still being held in federal custody pending posting of bail.
A Goldman spokesman declined to comment on the incident. A spokeswoman for the US Attorney in the Southern District of New York didnt comment. Authorities reportedly took all the computers from Aleynikovs home in New Jersey.
Sabrina Shroff, Aleynikovs lawyer, says the facts will bear out that her client is innocent. Shes hoping he will be released from custody soon.
His wife, Elina, says her husband is innocent. Speaking in a phone interview from the couples New Jersey home, she says her husband worked hard for Goldman Sachs and has been a good citizennoting hes lived in the US for 19 years. She seems mystified that federal authorities would arrest him on the eve of a holiday.
The Federal Bureau of Investigations, 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 would appear to match the description of a man named Serge Aleynikov, as it is listed on the social networking website LinkedIn.
The bio 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. In his own words, he goes on to describe the platform as a very low latency (microseconds) event-driven market data processing, strategy and order submission engine.
The case against Aleynikov may explain why the New York Stock Exchange moved quickly in the past week to alter its methodology for reporting program stock trading. Goldman often was at the top of the chartfar ahead of its competitors.
On the week ending June 19, Goldman, for instance, was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didnt appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE announced it would change some of the data for calculating the trading report. The Zerohedge blog was all over this controversy a week ago.
And now Tyler Durden of ZeroHedge has come in with his own excellent analysis of this strange, strange criminal case. I highly recommend reading it.
Its possible Goldman asked the NYSE to alter some of its reporting methodology after the firm discovered that someone may have infiltrated the proprietary computer codes it uses.
Heres 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.
Meanwhile, federal authorities appear to believe Aleynikov, who has lived in the US for more than a dozen years but frequently travels back-and-forth to his native Russia, may have had help. The German website that Aleynikov allegedly uploaded the stolen information to is registered to a person in London. That, of course, gives rise to speculation about this all being a case of international espionage.
This case is quickly unfolding and theres plenty more information to unearth about Aleynikov. For instance, it appears that he and his wife are competitive ballroom dancersthere are some videos of them on youtube.com. The job he took in Chicago, according to the criminal complaint, paid nearly three times more than his $400,000 salary at Goldman.
Which Chicago firm hired Aleynikov? Inquiring minds want to know. But you can rule out the giant hedge fund conglomerate Citadel. Its not them.
Also theres more to learn about anyone who might have been helping him and the fallout this 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. But authorities say after he uploaded the files he encrypted them and erased the program he used to encrypt them.
Its not clear why the authorities and apparently Goldman waited so long to move on Aleynikov, even though they knew he had uploaded the information weeks ago.
One question investors need to ask is whether this incident will have any impact on Goldmans second-quarter earnings. The alleged wrongoing by Aleynikov took place at the beginning of the monthalthough its not clear if it had any material impact on automated trading.
Update: The NYSE has not stopped reported program trading results. Instead, its altered the method it uses for putting together that report.
Major developing story: Matt Goldstein over at Reuters may have just broken a story that could spell doom for if not the entire Goldman Sachs program trading group, then at least those who deal with "low latency (microseconds) event-driven market data processing, strategy, and order submissions." Visions of swirling, gray storm clouds over Goldman's SLP and hi-fi traders begin to form.
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 has kept tabs on this data, and a datapoint 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.
Even more odd, this "disappearance" comes hot on the heels of what Zero Hedge reported could be potentially a major change to the way the NYSE provides its weekly program trading report. Of course, Ray over at the NYSE immediately replied to Zero Hedge that all was going to be same as always ... Odd, maybe he meant that all is back to normal except the reporting of Goldman's trades. Either way, it might very well be time for proactive readers to again contact the two employees publicly disclosed by the NYSE as lead-contacts on the issue. Readers will recall that it was these same two who were previously steadfastly assuring anyone who would listen that there would be no change at all in data reporting.
Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 or AleksandraRadakovic, Vice President, NYSE Regulation at (212) 656-4144
Alas, the just released weekly data proves that either theirs was a material misrepresentation of facts, or Goldman simply suddenly decided to stop transacting with the NYSE, or, what would be even more sinister, Goldman notified the NYSE to scrap all their trading data from the prior week. Why would they do that?
Going back to Matt Goldstein's story. In a nutshell, on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy over at 85 Broad (or maybe 1 New York Plaza, his detailed Bloomberg Bio page has disappeared) and had the following responsibilities at Goldman Sachs according to Linked-In:
Lead development of a distributed real-time co-located high-frequency trading [HFT] platform.The main objective was to engineer a very low latency (microseconds) event-driven market data processing, strategy, and order submission engine. The system was obtaining multicast market data from Nasdaq, Arca/NYSE, CME and running trading algorithms with low latency requirements responsive to changes in market conditions. Implemented a real-time monitoring solution for the distributed trading system using a combination of technologies (SNMP, Erlang/OTP, boost, ACE, TibcoRV, real-time distributed replicated database, etc) to monitor load and health of trading processes in the mother-ship and co-located sites so that trading decisions can be prioritized based on congestion and queuing delays. Responsible for development of real-time market feed handlers, order processing engines and trading tools at a Quantitative Equity Trading revenue-making HFT desk.
If the allegations are true, it looks like Goldman's hi-fi quant trading desk was thoroughly penetrated by a "spy", and as readers will recall, Serge[y]'s description of his job duties mirrors what Mr. Ed Canaday conveniently provided to Zero Hedge as a description of Goldman's SLP program. (Sources connected with the office of the United States Attorney have confirmed to Zero Hedge that Aleynikov was at one time or another a Goldman employee.).
The plot thickens: per FBI agent Michael McSwain's sworn deposition, Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Matt reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary (Hey Getco, is it time for a formal release at least denying you guys had anything to do with this, cause if you did it might not look that hot. No matter, we have reached out to our sources in law enforcement to confirm or deny Getco's, and Goldman's, involvement: once we get a response we will immediately advise our readers).
In the 5 days immediately preceeding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder. After all, from the affidavit: "certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading. The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.
What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.
Now the real question here is, does [GS?] feel lucky? Because the code has supposedly been in the hands of an outsider for over a month, one might suspect that anyone who wanted to has had ample opportunity - if the holder(s) wished to sell... Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks: after all, it is the very Goldman Sachs (which may or may not be the target of this program trading industrial espionage) which is the primary SLP on the world's biggest stock exchange.
Another major question: do Goldman and the NYSE not have a fiduciary responsibility to announce to both shareholders and any interested parties if there has been a major security breach in their trading operations? Certainly this seems like a material piece of information: given that program trading accounted for 49% of all NYSE trading last week, and Goldman as recently as one week ago represented about 60% of all principal program trading, will this be called an issue threatening the National Security of the United States. Shouldn't all market participants be aware that there is some rogue code in cyberspace that can be abused by the highest bidder, who very likely will not be interested in proving the efficient market hypothesis? What will happen when said bidder goes about trying to front run none other than the "Financial Institution" [GS]?
The complete affidavit can be downloaded from this post here, and is also provided Scribed below as this could (and likely should) become a matter of National Security. Zero Hedge will closely monitor this situation from the European hinterland and provide updates as they come. For really interested readers, we recommend tracking any potentially new developments on the forums and message boards over at Wilmott.
BOSTON (Reuters) - Citadel Investment Group, one of the world's most powerful hedge fund firms, sued a former top executive in its highly successful quantitative trading unit and two others for setting up their own firm.
Chicago-based Citadel, founded by 41-year-old billionaire Kenneth Griffin, said in a lawsuit filed on Thursday that Mikhail Malyshev and two other former employees had violated their noncompete clauses by starting their own firm, Teza Technologies LLC.
Teza Technologies made headlines this week when it was identified as the firm that had hired a former Goldman Sachs Group Inc (GS.N) computer programer whom federal prosecutors had accused of stealing trade secrets from the Wall Street investment bank.
Malyshev, a Russian emigre with a doctorate in astrophysics from Princeton, left Citadel's quantitative trading unit in February after the funds he helped run returned about 40 percent last year. Their performance stood out at a time most hedge funds lost money and Citadel's flagship portfolios tumbled 50 percent.
Like all employees who leave the $11 billion hedge fund firm, Malyshev faced a nine-month noncompete clause. A source at Citadel said the hedge fund had found out about Malyshev's new firm this week.
Former Citadel employees Jace Kohlmeier and Matthew Hinerfeld are also listed on the civil complaint.
A spokesman for Teza called the suit "frivolous" and said it "appears to be timed to harass Teza executives."
(Reporting by Svea Herbst-Bayliss and Christian Plumb; Editing by Lisa Von Ahn)
This is code.... not really this is the string(s) that did not proof out.
Goldmans Sachs case is bull****, and the fact that this code is beyond Public now and everyone knows it was just a witch hunt..
Oops never mind, Goldman Sachs is too big to be held accountable for fraud commited against and ex-employee.
This is strong arming and its best and financial terrorism (costs of maintaining a Court battle with the US Government on the behalf of Goldman Sachs)..
We've been using Erlang in commercial products for over 10 years now, and it's taken about that long to get into a position where we're considered a viable player for mission-critical product development. In order to get there, we've also been extolling the virtues of functional programming in general, and often cited Ocaml as an example of how you don't have to sacrifice low-level performance.
We feel that the ongoing paradigm shift towards multicore architectures is really helping our cause. There is much discussion about how to get all those legacy apps to work and scale on new hardware, and the advantages of functional/declarative programming are becoming more obvious.
Erlang is very strong in the area of concurrency, distribution and fault-tolerance, but fairly weak when sequential performance is of the essence (especially number crunching). When Erlang performance isn't enough, we usually jump into C-routines linked into the Erlang runtime, with all the problems associated with that. Often, instead of risking system integrity, we live with the performance we can get out of Erlang. It would be nice if we could present Ocaml as a safe (and productive!) driver environment for things like parsing text-based protocols, numerically intensive tasks, and complex sequential algorithms.
I've noticed that there have been some discussions about concurrency in Ocaml. From an Ocaml perspective, this binding could be a way to use Ocaml in distributed systems, where Erlang is used as a "systems glue" for supervision, load balancing, replication, etc.
Idea:
I'd like to explore the idea of running an Ocaml runtime in Erlang's memory space. Both languages are garbage-collected, and Erlang's linked-in driver interface allows for "drivers" that use their own threads. We could target only the multi-processor variant of Erlang, where this sort of cooperation becomes slightly easier.
For a looser connection, Erlang's distribution protocol is documented, and allows for "C-nodes" (non-Erlang nodes) to connect to an Erlang cluster over TCP. One could actually start with talking via regular pipes, using a common serialization format, and then gradually making a tighter and tigher connection.
I will make no false promises, like "if we do this, Ericsson will use it". I have no money to offer anyone, and we who have started looking at this on the erlang side have fairly little time to spend on it. Business as usual, in other words: no time, no money - just an idea that might be fun to explore.
Maybe they will arrest everyone else here too. As they too a flawed numerical sequence and combined to iron out the wrinkles which would seem to have in fact benefited Goldman..
But Goldman now owns numers in all form and any form that they deem? and whats worse is the quality of law enforcment in this country at the federal level has fallen off to such a degree that they (being the Feds) fall hook line and sinker for Goldmans Bull****.
Goldman will pick on an immigrant who works it would seems quite hard for them.. How about me?
The Erlang Plus Interface library (EPI) is a tool set of C++ classes to easily build applications in C++ what comunicates with Erlang. The intention of the library is to cover the holes that EI library offers:
An object oriented implementation
A simple API
Extensibility
Abstraction of comunication mechanism
Simplified management of incoming messages (mailboxes)
Once again removing the hub cap.. sending it out to be polished for free and then in fact returning the freely polished hub cap back does not make someone a car thief.
The corrupt code (to be clear one line of 40 billion) was uploaded with the hopes of it being corrected for free to the benefit of Goldman Sachs.
1, 3. 15 lines of code does not make a gaggle.. No one, including the company that origanly wrote the program in total... could piece the program back together based on available information.
Thats my 2 cents.
I hope everyone is having a great weekend, JW
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When JP Morgan (JPM) discusses high frequency trading, people listen. When the head of JP Morgan's algorithmic product desk Carl Carries says that high frequency trading is merely a form of parastic market making, people should run for the hills (not in the least due to JP Morgan's proficiency in transforming theory to practice especially as it pertains to various daily trading patterns in the SPY).
The print that a Dark Pool leaves in its wake does not signal an aggressive buyer or seller as would a sweep, so the information leakage is reduced accordingly. Reduction of information leakage minimizes adverse price movement created by predators like high frequency traders who feast upon the signals of others.
And a few more questions to add to the ever increasing roster of queries for the NYSE (Mr. Pellecchia- maybe the time has come to provide at least some answers?): some dark pools have banned use of third party algorithms in accessing them in order to prevent harm to their institutional clients. Why is this good for dark pools, but not NYSE?
Algorithm Switching Engine was introduced in October 2007, six months after Pipeline Trading banned third-party algorithms from accessing its own electronic block trading market.... Pipeline claims to be more effective than competitors in finding block matches because of its 50,000-share average execution size; large block orders are executed automatically without the possibility of sniffing out institutional interest with a small probing order.
Investment Technology Group, for the second time, has banned broker-dealers from accessing its POSIT crossing system via algorithms.... ITG chief executive and president Robert Gasser told analysts on the day of the decision that 'third-party dark aggregation has not been beneficial to our institutional POSIT constituency.'... Heckman told Traders Magazine that some brokers offering customers algorithmic access to POSIT appeared to give preference to their own or other liquidity through the algos. He said that adversely impacted the order flow POSIT received.
High Frequency Trading: Red Flags and Drug Addiction
Thoughts from Joe Saluzzi, Themis Trading after attending a High Frequency Trading event by STANY
By Joe Saluzzi, Themis Trading June 18, 2009
I attended a roundtable discussion yesterday morning produced by STANY titled "High Frequency Trading: The New World Order". In case you are not familiar with the subject, high frequency trading is the hottest thing in the equity market right now. Over 60% of equity volume comes from the high frequency traders (HFT). Basically, HFT's are computers that execute trades with extremely low latency. They live in a world of milliseconds. If your computer takes more than 50 milliseconds to execute, then you are a dinosaur in this business. The panel at this roundtable was comprised of 2 brokers that sponsor access to HFT's, one exchange rep that courts the HFT's and one option market representative. Here are my notes:
1) The high frequency trading business is extremely profitable. Based on the smugness and the smiles on the faces of the panel members, I could tell they were killing it. They reminded me of the "SOES Bandits" from the early '90's. But I sensed that they realized that their role in the market place was being squeezed and they were just trying to max out their profit before the game ended.
2) HFT's claim to be market makers and they claim that the liquidity they add to the market has lowered volatility and helped narrow spreads. But the problem here is unlike a traditional market maker, they have no requirements. No minimum size to display, no minimum time to display a quote and no capital commitment to a client.
3) There are very low barriers to entry to becoming a HFT. All you need to do is to become a client of a sponsoring broker. This will eventually cause market saturation and reduced HFT margins. Only the biggest, fastest computers will be making money consistently.
4) The HFT's tried to prove that they add value to the market by referencing the SEC's ban on short selling in 19 financial stocks last year. They noted studies that showed after this was enacted spreads widened by 40% and volumes decreased substantially. They said that since HFT's couldn't properly arbitrage the stocks, they simply did not participate. BIG RED FLAG should go up here. These HFT's can simply walk away from the market when the rules don't suit them. So what happens if the SEC enacts the uptick rule again or what happens if a major event causes turmoil in the market? Will these HFT's simply shut down their computers and walk away since their model has been corrupted. What happens to that 60% of the volume that they now control? Where will all that LIQUIDITY that they claim they provide go when the market doesn't suit them? A major vacuum will be formed in the market as multiple parties run for a much smaller than expected exit.
5) The exchanges actively court the HFT order flow since it is extremely profitable for them. They are like drug dealers trying to control their turf and the HFT's are the drug addicts. Making so much money with so little risk is extremely addicting.
6) I must commend the HFT's for one thing: they constantly were talking about risk to the system. They spoke of "naked access" (nice term) and how a rogue trader that comes unfettered through a brokers' system had potential to inflict major damage on the market. They spoke about the fact that the exchanges have no idea of who is on the other side of the trade since they are coming through sponsored brokers. They spoke of the lack of risk controls that are currently in place. Remind anybody of some recent market occurrences?
Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn't suit them anymore. Once their profit margins are squeezed to almost zero, they are likely just to move on to a new market. But what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today's market.
For example, high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mindcapture profit opportunities by being smarter and faster than the closest competition.
As a result of a New York Supreme Court judge's ruling, the fate of three former UBS employees accused of taking algorithmic code could rest with an industry regulator.
New York State Supreme Court Judge Barbara R. Kapnick on Thursday ordered a hearing before the Financial Industry Regulatory Authority to determine if UBS is entitled to a permanent injunction against three former employees in its algorithmic group, Jatin Suryawanshi, Partha Sarkar and Sanjay Girdhar.
UBS in March filed suit against Suryawanshi, Sarkar and Girdhar after the three moved to Jefferies & Co. earlier this year. In the firm's complaint, UBS charged the three with misappropriation of trade secrets and a laundry list of other offenses.
Lance Gotko, an attorney with the law firm Friedman Kaplan Seiler & Adelman, who represents the defendants, denies the charges. UBS, its attorneys and Jefferies have all said they would not comment while the lawsuit was pending.
UBS seeks a permanent injunction to prevent Suryawanshi, Sarkar and Girdhar from using any of the algorithmic code they're accused of taking to benefit their new employer, Jefferies.
Without any admission of wrongdoing, Suryawanshi, Sarkar and Girdhar were willing to have a preliminary injunction entered against them in order to expedite court proceedings, Gotko said. The preliminary injunction will function similarly to the temporary restraining order under which the defendants were placed back in March, Gotko said, and which the three agreed recently to extend.
The temporary restraining order prevents the defendants from using at Jefferies any of the UBS code they've been accused of taking. As they deny taking the code, their attorney said, this isn't an issue for them.
"The court basically will forbid my clients from using any confidential or proprietary information of UBS, including any source code," Gotko said, "which is fine with my clients, because they have not used any such information, nor do they want to."
The FINRA hearing is scheduled for Aug. 20, Gotko said. The court also scheduled a subsequent conference on Sept. 8, to discuss the results of the FINRA hearing, he added.
"The hearing scheduled for Aug. 20 is to decide on the merits, up or down, whether UBS is entitled to a permanent injunction against my clients," he said.
Letting FINRA arbitrate is proper and common procedure in a case such as this, according to an attorney who agreed to speak on background who represents broker-dealers and investment advisers in cases related to regulatory enforcement investigations and proceedings. The two parties will likely go to court if, subsequent to the arbitration, one of them requires some kind of monetary, property-related or injunctive relief.
UBS sued Suryawanshi, Sarkar and Girdhar, for misappropriation of trade secrets, breach of contract, breach of fiduciary duty, unfair competition and other wrongdoing.
Specifically, the UBS complaint alleges that Sarkar copied 25,000 lines of physical source code from UBS--roughly equal to one algorithm, or sections of several, according to sources. Sarkar allegedly emailed the code to his personal email account to develop or reproduce for later use, the complaint said. Suryawanshi, the complaint alleges, attempted to hide Sarkar's actions by deleting internet history files from his own UBS computer.
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