Tuesday, July 7, 2009

Breaking: FBI Arrest Opens Goldman-Sachs' Pandora's Box

Up until about two weeks ago, Matt Taibbi's favorite Goldman Sachs' market observers, the folks over at the Zero Hedge blog, had been continually commenting over the past six-plus months about how Goldman had all but cornered the market on program trading within the NY Stock Exchange. (Program trading is the automated stock trading via computers by firms specially authorized by the NYSE to facilitate same.) Clearly, according to Zero Hedge publisher Tyler Durden, something was up.

A couple of months ago, we also learned through Zero Hedge that Goldman had profited greatly from a sweetheart deal with the federal government concerning a new program instituted by the Feds known as "The Supplemental Liquidity Provider" Program ("SLP"), launched this past Thanksgiving, which was supposed to provide "market liquidity" (i.e.: an ongoing, active market) for selected groups of 500 different NYSE stocks per SLP participant. As Durden pointed out to all who were interested, it certainly appeared to him that Goldman was the only active participant in the program.

In April, we also learned that Goldman-Sachs had reaped the benefits of more $100 million-plus days of trading revenue than it had in the history of its business! (Yes, you read that correctly, $100 million dollars per day in gross income from its trading business.)

This past week, according to Durden tonight, things starting going downright stranger than strange when Goldman's name went completely missing from the NYSE's Weekly Program Trading report. The firm that, by far and away (jn most instances accounting for anywhere from third to more than one-half of all program trades throughout Wall Street), had maintained the top position in program trading on Wall Street for practically every week for the past six-plus months, all of the sudden was nowhere in sight.


...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.

Tonight, thanks to Matthew Goldstein over at Reuters, we now know this: "COLUMN A: A Goldman Trading Scandal?"


COLUMN A: A Goldman Trading Scandal?
By Matthew Goldstein

NEW YORK, July 5 (Reuters) - 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 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.

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.

As we also learned from the article, the criminal case "...has the potential to shed a light on the inner workings of an important profit center for Goldman..."


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 a comment from the criminal complaint against Aleynikov:


"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."

As Zero Hedge and Reuters are quick to point out, the case has the potential to actually pull the curtain aside for the public to take a look at the inner workings of Goldman's trading activities.

Speculation is running rampant throughout the blogosphere tonight regarding matters as diverse as the fairly well-known fact that Goldman is at the heart of the government's Plunge Protection Team, a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called national security, since the "PPT" group, created during the Reagan administration, is supposed to step in and prevent our markets from crashing), to the possibility that Goldman could have easily been "frontrunning" the rest of the market due to the implementation of their exceptionally fast proprietary code, identifying others' market-making trades and strategies, then acting upon them for Goldman's own benefit, executing in-house trades before the third-parties' trades were even concluded.

Whatever happens as a byproduct of these latest, breaking events, as Robert Scheer told us awhile back over at HuffPo, it's to the point where we've become either numb, or resigned, or both, to the extent of corruption that occurs there. Then again, Matt Taibbi just informed us last week that the folks over at Goldman are no less than responsible for every market bubble that's occurred on Wall Street since the 1920's. (See: "The Great American Bubble Machine.")

Get your tinfoil hats on and go checkout ZeroHedge's reader comments on this story, tonight. They're fascinating, running the gamut from one conspiratorial option ('...Aleynikov is a patsy...') to another ('...the proprietary source code for the government's Plunge Protection Team will be available for the public to view at any moment...').

They don't even make movies with scripts that are this good.

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