Ex-Goldman Sachs Programmer Found Guilty

Readers twoallbeefpatties and ngrier wrote in essentially simultaneously about the guilty verdict in the trial of former Goldman Sachs computer programmer Sergey Aleynikov. We've discussed the case several times before. The trial itself was sealed from the public to prevent discussion of GS's high-frequency trading system. Reader ngrier summarizes: "After just three hours of deliberation, the jury found Sergey Aleynikov guilty of intentionally stealing proprietary Goldman Sachs code. As he had admitted copying the code as he was preparing to join a startup competitor in 2009, the case hinged on the intent. He faces up to 10 years in prison."

Comments

Where is wikileaks when you need them

[entotre]

High frequency trading has no social benefit. If wikileaks could leak all source code of that type I would applaud it.

Re:Where is wikileaks when you need them

[entotre]

It assures that the market maker receives more money for a share than they would otherwise. The buyer then pays more money to a bank that cannot control its risk. I see no benefit in that.

Re:Where is wikileaks when you need them

[immakiku]

High frequency trading actually facilitates more accurate pricing of securities because of the liquidity it introduces to the market. The benefit of accurate pricing is hard to explain fully without getting deeper into the economics of markets, but it's definitely there. The animosity you raised is probably due to a perceived lack of contribution (no tangible products produced). But actually, facilitating better pricing will route investment into areas that deserve it (e.g. to the guy who produces 2 potatoes per unit resource instead of 1.5 potatoes). The sum effect of these actions is a raised social utility.

Re:Where is wikileaks when you need them

[hedwards]

No, he's correct about that. High frequency trading and technical analysis are trading strategies that don't depend upon the underlying company to make money. High frequency trading is worse because of the way that it works.

Unlike technical analysis which relies extensively on group think, high freqency trading, relies upon the knowledge of what the future price for a share is going to be and then slams in a trade that will, assuming it gets there in time, result in guaranteed profit.

It's basically a continuation of a practice which used to be pretty common. Stock brokers would have access to the price of company shares the next day and would be able to act upon that information in a way that the general public wouldn't.

The TL;DR version, high frequency trading is parasitic and needs to be stopped for the good of the market.

Re:Where is wikileaks when you need them

[geekoid]

which is why ever trade, buy sell, no exceptions should be taxed .01% we could remove the payroll tax, no taxes at all fro anyone under 200K, and get back on top with out education programs.

Wall street impacts our lives a lot. Everyone ones like,. High Freq trading can cause market crashes by mistake.

Re:Where is wikileaks when you need them

[hedwards]

You've been lied to. It's a bit like saying that the guy with the X-ray specs who wants to play poker is good for the game because it means that you don't have to wait for somebody else to fill out the quartet.

The problem is that while he does indeed have money, he also has X-ray specs which allow for him to have an unfair advantage over the other players.

High frequency trading is ultimately a scourge, the mechanic they use is a bit of sleight of hand to take advantage of momentary price fluctuations which leave them in the position where they're able to slam in an order for a guaranteed future profit, where other investors are locked out. It's something that I could do as well, if I were told what the price would be in the future and had the means of slamming in a bid in time to capitalize on it. There's little value to that sort of high finance piracy.

Even without that behavior, there's plenty of liquidity, the high frequency trading tends to target portions of the market, not the market as a whole, and even smaller trading stocks, there's typically plenty of liquidity for reasonable players.

Re:Where is wikileaks when you need them

[Yvanhoe]

And I may add that his kind of claims is made by people who "know nothing about the market", like Warren Buffet...
As a reminder, he asked for higher taxes for high incomes and to take measures against short-time speculation, which he apparently don't really like :
"We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.' "

Re:Where is wikileaks when you need them

[Yvanhoe]

The value of a company doesn't change in a few milliseconds instantly. Making investment decisions on so short scales is not really investments. There has been many voices to call for a change in the way transactions are processed. Instead of a first-arrived-first-served approach, using a bigger time step, like a second or a minute (personally I don't see why a whole day would be bad) and randomizing the orders would smoothen the values and iron out the speculation.

It really looks like high-frequency trading doesn't improve the accuracy of prices. It increases its precisions but we don't really have a way to measure if it is meaningful. Converging to a precise number doesn't guarantee that this number isn't arbitrary. To be fair, it is hard to imagine that these small scale variations at very high frequency is anything more than noise.

Re:Where is wikileaks when you need them

[vux984]

High frequency trading actually facilitates more accurate pricing of securities because of the liquidity it introduces to the market.

Liquidity has value. But HFT algorithms front running trades that would already complete without them aren't providing liquidity.

The benefit of accurate pricing is hard to explain fully without getting deeper into the economics of markets,

If market pricing were to consistently deviate from actual pricing by measurable amounts this would be relevant. But HFT algorithms front running trades to arbitrage fractional cents aren't providing any benefit whosoever.

The animosity you raised is probably due to a perceived lack of contribution (no tangible products produced).

We perceive a lack of contribution because there is a lack of contribution.

But actually, facilitating better pricing will route investment into areas that deserve it (e.g. to the guy who produces 2 potatoes per unit resource instead of 1.5 potatoes).

Sure. If pricing was that far out of whack. But we don't really need to "facilitate routing investment" to the guy that produces 1.50042 potatoes instead of the resource that produces 1.50041. The only person who cares about that difference is trying to profit on that 0.00001 delta.

The sum effect of these actions is a raised social utility.

The sum effect of these actions is parasitic to actual investors leading to a diminished "social utility". (whatever that is supposed to mean.)

Re:Where is wikileaks when you need them

[igreaterthanu]

high freqency trading, relies upon the knowledge of what the future price for a share is going to be and then slams in a trade that will, assuming it gets there in time, result in guaranteed profit.

(emphasis mine.)

The guaranteed profit part is only a very small subset of HFT.

Most of the time it only takes part in transactions which has some expected gain, but by no means always makes said gain. By doing this millions of times per day, in theory, it averages out.

Just like a bank will borrow people's money and loan it other people, at a profit, thus making the market more liquid by matching borrowers and sellers and taking the risk on themselves; these HFT traders buy and sell stock, providing liquidity and taking on risk themselves for a small profit (which gets multiplied by a large factor when done million times)

Sure it's not ideal, but can you come up with a better system?

Re:Where is wikileaks when you need them

[timeOday]

The problem is that while he does indeed have money, he also has X-ray specs which allow for him to have an unfair advantage over the other players.

To emphasize this point, here are quotes from an article last year on this same story:

Loopholes in market rules give high-speed investors an early glance at how others are trading... some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds -- 0.03 seconds -- in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

Sounds like plain old insider trading to me. Maybe worse, since it's the market-maker who's taking kickbacks.

Re:Where is wikileaks when you need them

[vinn01]

No, it's not insider trading. It's called "front running"...

"The unethical practice of a trading ahead of your client based on knowing how your client is going to trade"

In plainer English - it means that the trader (high frequency in this case) is using their position (X-Ray specs) to see some orders ahead of everyone else. The trader then puts in their own order ahead of all the others. Since the trader's order was first, and the market moved in that direction - guaranteed profit. Then they dump what they bought immediately and look for the next order that they can front run.

Re:Where is wikileaks when you need them

[quarterbuck]

It is not front running exactly - at least from the High frequency traders perspective. They don't have clients (other than themselves). It is the exchanges which are allowing their clients to be front-run.
In that sense, HFT guys do have insider information received from exchanges that some client is about to trade.
So either definition seems OK.

Re:Where is wikileaks when you need them

[_merlin]

You and most of /. really have no clue how market making works, HF or not. Some people have reasons to buy derivatives (futures and options). A coffee roaster might want a call option on raw beans to protect themselves from price rises, and likewise, a coffee grower might want a put option to protect against falling prices. If you estimate the volatility of the underlying asset's price, you can calculate a theoretical fair price for a derivatives.

Now suppose I use my model to calculate a particular option is worth $10. If the market is wide open, I could offer to buy it for $5 or sell it for $15 - making a market with a spread of $10. In this situation, I could make $5 of profit, or "edge", on each option I trade. But you might decide you can afford to quote $6/$14 - now you'll pick up all the trades with an edge of $4. I won't want you to get all the action, so I'll have to quote inside your spread - maybe $6.50/$13.50 - and other people will get in on the action. As the number of market makers increases, the spreads tighten, and the people who actually have a purpose for the options get a better deal.

The exchanges take a percentage of each transaction, so they want to attract as many traders as possible. Part of this is offering narrow spreads on derivatives. To make the spreads narrow, they will try to attract market makers. This is often done by offering rebates on fees to people quoting sufficiently narrow spreads for a high proportion of the time.

In a liquid market, the spreads will be very narrow, and thus the edge on each transaction will be tiny. As a market maker, you need to be making enough to pay your traders and software developers, so you need to make sure you get as many of the trades as possible. Latency is the killer, so you need to do anything you can do to keep it down. Co-locating your system at the exchange costs you money for rack space, but it will give you lower latency, and therefore more chance of being first in and getting the trades. Everyone does this now, so it's simply a cost of business if you want to make money. Beyond this, you need to employ smart developers and IT people to keep making your system faster. Everyone is doing this now, so at it's like an arms race - you have to keep getting faster or you will lose out and not get the trades you need to make money.

The upshot of this for everyone else is that derivative prices are fairer - when you want to hedge, you won't be incurring much cost over the theoretical fair price of the instrument.

Steal from a company, go to jail...

[spagthorpe]

Steal from a few hundred million, get fat bonuses....

Smooth Criminals

[MoldySpore]

Goldman Sachs are the criminals. Why aren't they all on trial too? All this guy did was steal a little code. They've been robbing their customers for years.

Re:Smooth Criminals

[pyite]

They've been robbing their customers for years.

Their customers, who are by and large not idiots, would obviously leave them if this were the case. Yet, they do not leave. They realize the simple truth that Goldman is extremely good at what they do and that includes helping customers make money.

Just because you don't understand something doesn't make it bad.

Re:Good grief.

[timeOday]

But it proves once again, wealth is not about creating value, but owning it.

Good God

[genfail]

Ten years for just stealing a little code. Damn you would think he gambled with investor funds on risky phantom products that sent the whole economy into a tail spin. But I guess that's what they call their business model.

high frequency trading needs to be outlawed anyway

[circletimessquare]

high frequency trading demands you have the screamiest servers the shortest fibre optic hop away from wall street. meaning it turns what should be an egalitarian marketplace of equals into one where those with the most power and resources are able to extract a tax of sorts on regular traders by engaging in high speed tricks

just put a "heartbeat" into the market: all trades operate on a FIFO queue that is released on a regular interval: every 3 seconds, every second, every 10 seconds, every 500 milliseconds, whatever: the point simply being that no trades can operate faster than this "heartbeat", thereby putting all trades on an equal footing

otherwise, the stock market will be abused by its richest players. when that happens, small time and mom and pop stock market traders will feel abused, and opt out, and the market will ossify into corruption

the point of a well-regulated marketplace is to keep the marketplace fair and healthy and a place of equals. so deny the powerful this unfair leverage and unfair ability to siphon off a tax on all other traders just by doing little fast tricky trades that have no real value whatsoever other than to take money from the slower smaller players

Re:high frequency trading needs to be outlawed any

[cosm]

Very true. The concept of value investing has been long lost to the market. If any of you are traders, or if you are looking at getting into trading, I recommend checking out the book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman.

I read this book, and after was astounded with how true it rings, not because of the money I earned (I don't even invest), but because of the insights it provides into the greediness and irrational nature of the market.

To summarize the book, buys stocks based on what you think their value is, which actually requires doing a value analysis on the stock and buying when it is undervalued, and selling when it is overvalued, as to just getting sucked into the latest get rich quick stock or bond at the height of its balloon, only to have it pop.

Good luck finding a copy under $500 dollars. This is a rarity. It was once deemed the most stolen book from libraries in the world by the NYT.

But I may have seen it available on torrents before :)

A bank VP once told me...

[gestalt_n_pepper]

"If you're going to commit crimes, son, start with the legal ones."

This was at Crocker Bank in the 80s, which was subsequently bought by Wells Fargo, who laid off thousands, including me. When that happened, I suddenly saw his point.

Re:high frequency trading needs to be outlawed any

[circletimessquare]

efficient?

you are basically advocating for shady marketplaces that are rigged by their most entrenched players. if the markets are not egalitarian, the markets are abusive, and you are cursing the entire concept of trading to the realm of corruption, which will decrease the overall market value a heck of a lot more than what taiwan and korea are suffering, i assure you

for a market to be truly free, that is, a meeting place of equals, it must be in the full light of day and be highly regulated. truly "free" marketplaces, that is, without any regulation at all, are, as a rule, dominated, abused, and taxed by their largest most powerful players

a marketplace that is regulated and transparent and well-policed and well-understood, is a marketplace that attracts investors with confidence and trust in what they are getting into. your dark marketplaces meanwhile are more a deal of who you know. the definition of nepotism and all manner of ills that befall fools that get involved in such financial chicanery

your way is the way of financial doom. you are ignorant of financial history. the fate of such dark marketplaces is well understood and oft repeated throughout history