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Is Uncle Sam Manipulating the Equity Markets?
Part II

Posted by Larry Doyle on July 6, 2009 7:47 AM |

Who does not like a good summer read? Well, combine money with espionage and we have all the makings of a fascinating story.

The other day I wrote a post, “Is Uncle Sam Manipulating the Equity Markets?”, highlighting allegations by Joe Saluzzi of Themis Trading of highly suspect trading activities on the NYSE. Another chapter in this fast moving intrigue unfolded over the weekend.  Thanks to kbdabear for sharing a Reuters news release, “A Goldman Trading Scandal?”, which adds significant fuel to the fire. Let’s review in a rational fashion. Reuters reports:

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 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.

Who is this individual, Aleynikov?

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.”

Could Aleynikov have been intimately involved in Goldman’s proprietary trading activities or was he a disgruntled computer programmer? Well, he was paid 400k by Goldman and then supposedly hired by a heretofore unnamed Chicago-based firm for three times that figure. Those are big numbers for a programmer.

Other unknowns as of now include:

1. did Aleynikov fully appreciate what he may have been taking?
2. did Aleynikov have assistance in the theft?

Reuters reports Aleynikov downloaded the code to a German based website.

3. did Aleynikov, or anybody at his new firm, actually try to utilize the computer program?
4. the NYSE mysteriously extended the close of trading on July 3rd to 4:15pm. Did this story play into that development? Were the Feds trying to develop a paper trail?

We may never know the answers to these questions nor the full extent of this financial espionage.

What have we learned? Kudos to ZeroHedge for consistently highlighting the program trading activity reported by the NYSE. The methodology for these reports is now being altered, as Reuters reports:

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 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.

What did ZeroHedge uncover?

“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…”

For my purposes, this piece of data is the most meaningful of all these developments. It is totally consistent with the color provided by Joe Saluzzi.  While I will leave the intrigue of the financial espionage to the lawyers and the authorities, as a former trader and current investor, my instincts immediately question what information Goldman might have that would put them in a position to generate 30% of total NYSE volume. If I do not have access to that information, then I am going to be more risk averse.

While others can play out the conspiracy theory, I will focus on the economic fundamentals. On that front, I continue to see major hurdles on our economic landscape.

To wit, the major market averages are poised to open down 1% while the bond market is unchanged in the face of the massive Treasury auctions ($136 billion) this week.


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