An American Lion

Now that the financial crisis that was never as bad as advertised but was certainly caused by greed combined with incompetent oversight has dissolved into farce and backbiting, the venerable firm of Goldman Sachs can count on more stories like this:

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 institution—that 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 Goldman’s 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.

That there are "hackers" going after cracks in the edifice of major companies is not news. It should be understood to be the norm, not the exception. The real problem with the reporting here is not the story itself, which is a simple criminal matter that the suits can sort out, but rather, the need to take shots at Goldman Sachs for the sake of doing so. The article, by Matthew Goldstein, adds this gratuitous piece of sensationalism:

The case against Aleynikov may explain why the New York Stock Exchange moved quickly in the past week toalterits methodology forreporting program stock trading. Goldman often was at the top of the chart–far 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 didn’t 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.

But what they don't tell you is that this is not an issue at all:

Sadly, the story quickly morphed into a self-feeding conspiracy theory, with Tyler @ Zerohedge and Matt Goldstein at Reuters somehow each quoting the other's article in their own story. Naturally, hype-first-ask-questions-and-do-proper-research-later savant Karl Denninger hopped right on the paranoia bandwagon.

There is definitely a story regarding Goldman's sudden falling off the program trading league tables, but it is most certainly not, as Reuters' Goldstein suggests

"On the week ending June 19, Goldman was ranked first on the NYSE program trading list. But on the week of June 22, Goldman mysteriously didn’t appear on the list of the top 15 firms at all. It simply vanished without any explanation. Then the NYSE stopped reporting the numbers. The Zerohedge blog was all over this controversy a week ago."

We know, if we simply read the report from the NYSE, which I explained last week, that 1) The NYSE did NOT stop reporting the data. The report will continue, using automated, more accurate data, and that 2) the "NYSE stopped reporting the numbers" foil hat explanation is especially ridiculous considering that the changes haven't gone into effect yet! I would have expected more journalistic integrity from Reuters. Anyway.

Perhaps Goldman also misread the rule change (unlikely) and stopped reporting their DPTR numbers a few weeks ahead of time - this is extremely unlikely. Perhaps they totally pulled their quant models from the marketplace, as a result of the theft of some intellectual property, which Tyler covers extensively in his post. Still, I am very confident that GS would have still had significant program trading volumes to report. Perhaps there was a simple error in the report and Goldman's data got wiped off the grid portion - this seems most likely to me, as the numbers in the report appear to be inconsistent, with the "Total for all member firms" volume being lower than the "total for top 15 reporting member firms" volume, which shouldn't be possible.

There is an interesting coincident story which the Zerohedge post focuses on - that of a former employee of what appears to be the Goldman Sachs quant desk, who basically stole the code from his former firm and brought it to his new firm. He was stopped by the FBI on his way back from Chicago. This is a standard intellectual property case, although Tyler Durden is asking why the FBI is involved. Well jeez - for a guy who has a PhD in Goldman Sachs conspiracy theories, TD should have been able to answer his own question: you don't mess with Goldman. If you do, they release the hounds on you.

Excellent analysis.

Poor journalism, combined with the gotcha blogging practices or our current day, can be unraveled quickly and efficiently by the skilled hands of a Kid Dynamite. What no one seems to understand is that a lazy regulator or an uninformed investigator can be snowballed into creating a file, an investigation, and a case in a matter such as this because of the errors or misconceptions. They are reactionary, not proactive by nature. Say someone in the New Jersey Attorney General's Office was reading Goldstein or Durden last week and missed what Kid Dynamite had to add--today's the day when said office might be rushing forward with inquiries or whatnot, flushed with madness and fear of the Goldman Sachs juggernaut.

If you don't think that the regulators and investigators are not lazy, simply ask yourself this--how'd we get into this mess in the first place? Our financial system is only as sound as the reputation of the firms that operate in it. The rush to demonize firms and tear them to pieces is misplaced populism, nothing more. Take care that the arrows you fire land where needed.