Former Goldman Programmer's Conviction Overturned

i_want_you_to_throw_ writes "The legal woes will soon be over for Sergey Aleynikov, a former Goldman Sachs Group computer programmer who had been convicted of stealing part of the Wall Street bank's high-frequency trading code. A federal appeals court overturned his conviction and recommended acquittal. We previously discussed this story when he was sentenced to 97 months in prison. It will be interesting to see their reasoning (an opinion is to be released) as well as what this may mean for other programmers developing high frequency trading code."

Comments

Shouldn't be legal to use in the first place.

[tragedy]

High frequency trading code shouldn't be legal to use for trading in the first place. It doesn't provide anything useful ("liquidity" has no place in an investment system, it's only good for speculative investing, which is just gambling), and simply parasitically leaches from the market and destabilizes it. The people the programmer was working for are the ones who should be convicted.

Re:Shouldn't be legal to use in the first place.

[Anonymous Coward]

"liquidity" has no place in an investment system, it's only good for speculative investing, which is just gambling

I don't understand it, therefore it's bad.

Liquidity is really important. It's the ability to resell an asset. Buy and hold forever is great for Warren Buffet, but it is not so great for investors who want to sell stock in the future to finance their retirement or their kid's education.

Re:Shouldn't be legal to use in the first place.

[maroberts]

If you want to finance your retirement or your childs education, you don't need to sell shares every 5 seconds, so liquidity means little in this regard. It would not be the end of the world having to wait a week or two for money for such purposes.

Re:Shouldn't be legal to use in the first place.

[KiloByte]

And even more important, you would get the full money, instead of a significant part being lost to crooks running HFT. Every penny earned by them is a penny lost by actual investors.

Re:Shouldn't be legal to use in the first place.

[greg1104]

True liquidity requires that trades be backed by some ownership. HFT only provides the illusion of liquidity in one direction--that which the stock is moving in. Where they truly a source of liquidity, in both directions, high-frequency traders would have helped minimize the impact of the large sell orders that started the 2010 Flash Crash. Instead, they helped create that crash.

Re:Shouldn't be legal to use in the first place.

[Anonymous Coward]

HFT PROVIDES NO LIQUIDITY DURING A LIQUIDITY CRISIS!!! one would think we would have learned this form the May 5 micro crash.
holy fucking shit get out from under your rock. the HTF algos are programmed to turn OFF any time Liquidity is really needed. Your ignorance to think firms would provide liquidity during a crisis shows you have no understanding for a corporations value in surviving and making a profit.

http://www.zerohedge.com/news/example-hft-liquidity-10-bid-ask-spread-14-stock

http://www.zerohedge.com/article/all-you-need-know-about-hft-sell-everything-and-shutdown

http://www.zerohedge.com/article/60-minutes-brings-hft-mainstream-cftc-refutes-hft-liquidity-provisioning-argument
  "HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day." Said otherwise, Liquidity-to-Volume ratio: 0.00206%.

also it a crime to trade against the HFT machine so it really is a rigged casino.

for all you math lovers out there. here an htf algo gone wild with pretty charts as it works to destroy price discovery:
http://www.zerohedge.com/article/story-berserk-nat-gas-algo-just-got-really-strange (last chart is the best)

http://www.zerohedge.com/article/another-algo-gone-wild (price is $2.50 and $8.50 depending on where you ask and locations are seperated by about 12 milliseconds of travel time) there goes price discovery and liquidity.

here come of the best math porn i scene in a while.
http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation-

Re:Shouldn't be legal to use in the first place.

[meerling]

The state run stuff is the government, and you know how they like to run themselves under different rules than their populace.
The indian casinos are only due to the tribes having sovereignty, in other words, they are state ran, it's just a different government than the USA government.
Nevada being legal for non-government gambling is pretty odd. I think Atlantic City is the only other place that allows that kind of stuff in the US.

The gambling that is allowed in other places and circumstances in the US, is not commercial. It's in the personal entertainment category, and sometimes it's actually legal, other times it's just ignored by the police. Yes, that's right, in most places in the US, that saturday night poker game or church raffle are usually not legal, but the cops don't care and won't enforce the laws on those types of situations. On the other hand, start a casino, or get too big, then see what happens.

ianal, nor an expert on gambling, I've only looked into it a little bit back when the indian casinos started popping up out here, so if it really matters, go do your own research and treat mine as 2nd hand rumor :)

Re:Shouldn't be legal to use in the first place.

[tragedy]

I should have said "high liquidity" then. Obviously we shouldn't eliminate the ability to trade and sell stocks. But the argument always given for what high-frequency trading actually provides the market is "high liquidity". That isn't desirable at all in actual investing. High liquidity just means instability. Algorithmic trading in general just leads to instability.

Real growth of wealth comes from capital actually being used for real things. The stock market can help wealth grow by providing capital to accomplish real things. All the secondary activities of the stock market, however, don't provide any real benefits, they just move money around, often to the detriment of real wealth creation.

Re:Shouldn't be legal to use in the first place.

[Tuan121]

It really doesn't surprise me what gets modded "insightful" here these days.

Liquidity has no place in an investment system you say? So you mean, if you have some shares of Apple and you want to sell them, you should have to try to shop around to sell them and pay a large transaction cost just to get rid of something that has a market value? And how is that market value determined if there are not people actively trading the product? You can say a widget is worth $100 million, but until someone actually buys it for that price it's just imaginary.

And speculative investing is not good you say because it's gambling. Hmm, so what is buying shares of a new start-up company then, this would be investing, but not gambling?? I don't think you understand that both are in many ways the same thing. Investing IS gambling in every single way.

Re:Shouldn't be legal to use in the first place.

[the eric conspiracy]

You are just wrong and your comment has been moderated up by people who have no knowledge of reality. High liquidity and maintaining equal prices across markets through arbitrage are valuable positive features of any trading environment that are enhanced by HFT. They assure you that you will be able to quickly get a fair price for your assets when you want or need to sell. Without these features your investments are far more risky and thus are worth less.

You really need to read up on basic principles of investing. In particular the concept of why liquidity is more important than either safety of capital or return.

Re:Shouldn't be legal to use in the first place.

[tragedy]

I think you're looking at this from a fundamentally different perspective than me. Your concern is entirely for the individual investor, probably since you are one. That's fine in a casino environment. The stock market, however, is not meant to be a casino. The justification for its existence and for treating it like something other than a gambling parlour is that it's a system for providing capital for companies. As such, the selfish needs and desires of individual investors aren't the only concern for the market, not when these markets are one of the props that hold up the economy. The basic principles of investing that you mention I should read up on are based only on the perspective of an the individual investor. From the point of view of the individual investor, successfully gaming the system and the other investors involved in the system is a pure positive over the short term. From the point of view of the system and the economy, operating that way is harmful. Curbing it does reduce the opportunity for some players to win big at the expense of other players, but it increases the possibility that more players will achieve modest gains and that the overall gain will be greater than if just a few players are able to win big.

In essence

[Anonymous Coward]

He took a copy of the code of an internal tool, not something that they sell to customers. Would you really consider it evil to save a copy of your log viewer, for example? The law was intended to protect sold products.

Re:In essence

[alen]

he didn't take a log, he took the algorith and source code that took years to develop and which was meant to be used only internally

this is like a Moto engineer taking a new antenna or radio noise reduction algorithm and going to apple with it hoping to get paid $$$$$

Re:In essence

[maroberts]

If you produce a product as part of work for hire and then steal that code and sell it on to a third party, it's still a form of theft.

It was however, perfectly legitimate for him to walk out with the knowledge of how stuff worked in his head and sell his expertise; I'm surprised he didn't do so. Once you know how something is done, you have solved the hard part and can spout a new set of code out of your head with little difficulty. Often producing a product the second time means you can do things better and faster anyway.

There's a lot of blurring between personal and work computers nowadays, which does mean you may have a copy of stuff you have developed on your home PC, and that can make things awkward. But if you do mean to sell something you've worked on to another party, you'd damn well better make sure that right is in your contract.

90% reduction

[alexander_686]

Unless you count a 90% reduction in trading costs as “nothing”.

Back in the day Market Makers would take $.125 to $.25 for every share traded. And woe to you if you were trying to sell more than 10k because then you would really be scalped. And then you had to add broker commissions on top of that.

I would rather pay high frequency traders $.01 a share and have a deep liquid market then go back to the good old days

Re:90% reduction

[Anonymous Coward]

Those fees are only a problem if you don't plan to hold on to your stock very long: after a few years or more of capital value change plus dividends, it's insignificant.

What's that you say? You like to buy and sell on a timeframe of weeks? Well, that's speculation not investment, and we need less of that. I'm happy to have that anti-speculation incentive built-in.

Re:90% reduction

[barc0001]

I don't think you understand how this works. The high frequency trading is literally placing thousands of orders milliseconds apart and 98% of the orders don't get filled or get rescinded, basically it's like spam. Algorithmic trading causes values to adjust outside of normal market forces, and there's strong suspicion that it was the cause of the 2010 Flash Crash.

Re:90% reduction

[GlobalEcho]

For what it is worth, academic research indicates that HF trading significantly increases liquidity. The main people it hurt were the floor-based stockbrokers. There is a natural human tendency to detest the "middleman", who appears to generate nothing of value, in all economic endeavors. One notices it for market makes, car dealers store owners and so on. But middlemen actually do provide a valuable service to society. In Nature's Metropolis by William Cronon there is a fascinating study of the mutual resentment of the wood wholesalers, hardware store owners, and the public in the 1800s, even as everyone was getting much richer and healthier.

Re:90% reduction

[Rockoon]

The New York Times wrote [that] the joint report then noted "Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling." As computerized high frequency traders exited the stock market, the resulting lack of liquidity "...caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000." These extreme prices also resulted from "market internalizers," firms that usually trade with customer orders from their own inventory instead of sending those orders to exchanges, "routing 'most, if not all,' retail orders to the public markets -- a flood of unusual selling pressure that sucked up more dwindling liquidity."

2010 Flash Crash

Re:90% reduction

[mrops]

That is the problem with the entire stock trading mentality. Stocks are viewed as commodity that makes the investor rich, no one views them as investing a company that will succeed with the investor's money.

Re:90% reduction

[Anonymous Coward]

It's another $40 to sell.... those are trades too.

Re:90% reduction

[AuMatar]

Because you aren't. If you were investing in a company, you'd be giving them capital to use for purchasing/hiring/research. Unless you're buying in an IPO or secondary, you're not giving the company any money at all. So it's not investing, it's legalized gambling where you wager on companies, not invest in them

Re:90% reduction

[boorack]

You assume that they provide liquidity which is not true with HFT and that $.01 a share cheap which is also not the case for HFT traders.

Regarding liquidity, HFT provides an illusion of liquidity. When a bunch of computers banging, say, 500 shares between themselves over and over again 500 times a day will generate 250000 volume but this does not mean that market is so deep. You see, there are only 500 shares in use. When some big, traditional (institutional?) investor fooled by this artificially high volume decides to sell 100000 shares, it will impact market much higher than if that 250000 (or even half of that) was a real volume. To make thing worse, computers trading these shares will propably detect and try to take of this incurring even more losses to investor (potential gains for HFT trader) and potentially cause some form of flash crash. In the end, traditional investors typically get much worse off with HFT than without HFT, even seeing [lack of] real volume.

Regarding $0.01 - remember that this is $0.01 times billions. It results with hundreds of millions of dollars getting sucked off market by HFT operators instead of being directed into actual, productive investments (thing that stock markets are supposed to be created for). That this money is sucked off penny by penny does not matter. It's still real investments deprived of hundreds of millions of dollars every day by Goldman Sachs and its cronies.

In my opinion HFT is a fraud, nothing more. The fact that it's (still) legal is just a sign how corrupt whole system is.

Re:90% reduction

[Zak3056]

That is the problem with the entire stock trading mentality. Stocks are viewed as commodity that makes the investor rich, no one views them as investing a company that will succeed with the investor's money.

Given that so many companies don't pay dividends, I can't help but wonder what "investors" are actually investing in? I mean, I'll grant it's not true across the board, but pick any tech company, and if they're making money, it's for the sole purpose of sticking it in the bank. Apple has, what, $100B in the bank? To what end? It's not hard to see why we have this mentality, and why our market is all about finding a bigger idiot.

FWIW, my money says that one day we're going to find that something like the Teamster's pension scandal has happened again.

Re:90% reduction

[ak3ldama]

It seems so basic, that any sell or buy order would have associated with it a price limit, why would anyone blindly say to "sell these X shares at any damn price you can!" is beyond belief. What is the point of liquidity when it comes at the cost of stupidity? If you base your view of behaviors off that of individuals this would be immediately, or rather abruptly, be brought to attention. Why would a farmer decide to sell his 10 bushels of oats for only 1/10th (or less!) of what he previously determined it to be worth?

Back to point, why should anyone else care if particular entity sells a large number of a given item and exhausts the buyers market? You can choose to determine that regardless of what they did, you still believe it to be worth holding onto. It is as if it were an involuntary loss of freedom - the algorithm says sell it!

Re:90% reduction

[maple_shaft]

But as was already said, this is speculative trading and NOT an investment. If you are a small time investor and are trying to engage in speculative trading then you are just asking to be bilked of your money. You don't overhear the chatter on the trading floor. You don't see breaking news happening before it goes public. The day traders and hedge funds will eat your lunch. You might as well be playing blackjack at the casino.

If you are a small time investor you are much better off studying earnings reports and making long term investment choices in blue chip stocks that pay dividends than trying to play the big boy games.

Re:90% reduction

[barc0001]

Actually, it would be better to simply get rid of algo trading by adding a $0.001 "tax" to each share traded. That would affect "real" trades very little, but would completely obliterate the profitability of algorithmic extreme-transaction-volume trading. To be absolutely clear we are not talking about your ability to trade stocks yourself through something like E-Trade, we're talking about brokerage houses doing hundreds of thousands of transactions per day trying to carve additional profit for themselves. Have a look at this TED Talk on the matter that was posted to /. a while back for some further perspective.
http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_our_world.html
The relevant bit starts at around 2:45.

Re:90% reduction

[ed1park]

Warren Buffett has a great solution for this. A 100% capital gains tax on short term investments! (less than 1 year)

Re:90% reduction

[pclminion]

So if a company has a good long-term outlook and I buy in, and the stock does well for a period of time, then six months later the CEO dies in a car accident and is replaced by somebody who immediately starts running the company into the ground, I shouldn't be able to exit my position and take what little gains I can before they become losses? You want me to just hold on and get fucked because the situation changed dramatically? Am I supposed to read the future? It's one thing to speculate, it's another thing to be in for a long haul and decide (rationally!) to abort when things take a turn for the worse.

Re:90% reduction

[pclminion]

Given that so many companies don't pay dividends, I can't help but wonder what "investors" are actually investing in?

That's like asking, why have money? Money doesn't pay interest on itself, it just sits there, what good is it? The reason you accumulate it is the same reason you would accumulate stock -- you are betting on the proposition that the money (or stock) will provide sufficient value to be exchanged for things you want.

When I hold on to cash, what I'm doing is betting that prices will go down. If I believe prices will go up I convert that money to something else. So I have a hard time understanding why buying and selling stock simply to profit from movement in price, is any different from the decision to hold money or spend it based on current trends of inflation.

Re:90% reduction

[umghhh]

Not really true. The trade in stocks is a valid function of stock markets. This indeed provide liquidity and equalizes the prices between different market places. It is also not realistic to call people buying stock and selling it next day - speculators - this does not have to be the case and there may even be regulations forcing some of the actors to do so (pension funds or banks may be required to sell if certain things happen etc) . It is however not true that the frequent traders did decrease the price either. The price decreased after more actors started playing, market got deregulated etc. The frequent trading did change the character of the game though - especially as high volume frequent trading agents can see in 'the future' essentially ripping off everybody else. They are also indeed pure speculators that do not bring much to anybody else and instead bringing barriers into the trading for everybody not only with this 'looking in the future' thing but because of the weight of their trades everybody else is outsmarted or even the price is influenced in a way not having anything to do with real economy and possibly profits are made in such way too. It also must be remembered that albeit there are claims to contrary there is very little that frequent traders actually create. In general more frequency is not really needed there and some limits were in place. You may argue that either limits in frequency or tax on operations or some mix of both or some other feature. OC you are on the losing side of the argument if you claim such things as the HFTers have enough money to convince lawmakers of that their righst are god given and do not have to satisfy any need of a nation.

Re:90% reduction

[Anonymous Coward]

You can exit your position and recover your original investment, just not any profit you may have gained in your short term scenario. Of course, your contrived example of the CEO dying and the company tanking probably means that you lost money anyway and since you only pay capital gains tax on gains, then your scenario would play out the same in today's market also.

Re:90% reduction

[farble1670]

Apple has, what, $100B in the bank? To what end?

it's so when the start their eventual descent into stagnation, they'll be able to hang on for years making substandard products.

Re:90% reduction

[drsmithy]

a good example is steve j. people pretty much viewed him as *the* man with the plan, and the brain behind all of apple's recent success. did the company fall apart when he passed away? nope, stock is still going up. apple has built a culture around steve's thinking.

Well, let the body get cold before you get too carried away. Come back in a few years after they've been through a few product cycles without The Steve.

The last time he left it didn't work out so well.

Re:90% reduction

[RockDoctor]

You might as well be playing blackjack at the casino.

In a fair game of blackjack, it is possible for a skillful player to retain their money, or even to win for a short period.

You don't think that the people who manage the stock market would allow a situation like that to exist, do you?

relax people it's a technicality

[alen]

his lawyers convinced an appeals court that coding for a system meant to buy and sell stock across state and international borders wasn't "interstate commerce"

I suspect congress is going to amend this law soon

Prosecution flubbed it

[GlobalEcho]

If you read TFA looks you find that, in their eagerness to get the maximum news and sentence, the prosecution chose the wrong statute to charge him under. If they had just treated this like any other case of illegally copying an employer's code and not tried to get cute with the "interstate commerce" bit, they would have had a rock-solid conviction.

90% reduction? Who cares? Gamblers!

[s-whs]

Unless you count a 90% reduction in trading costs as âoenothingâ.

Back in the day Market Makers would take $.125 to $.25 for every share traded. And woe to you if you were trying to sell more than 10k because then you would really be scalped. And then you had to add broker commissions on top of that.

I would rather pay high frequency traders $.01 a share and have a deep liquid market then go back to the good old days

(- infinite, moronic)

Who gives a damn what percentage some trader wanted? For one it's all mostly automated so fees should be very low now, and for another, if you don't need to/want to buy/sell frequently then the small charges are a non issue. They are only an issue if you want to trade a lot because you want to gamble on changes in values of stock. So the original poster was right, high freqeuncy trading is valueless and should be disallowed. It's gambling, and not just simple gambling, but gambling that destabilizes economies.

Since when has stealing been illegal on Wall St?

[elrous0]

If they convicted everyone there who was a thief, who would be left?

It just goes to show you

[eternaldoctorwho]

that Goldman sachs.

Reproducing algorithms is dangerous ...

[perpenso]

I agree there is nothing illegal about walking out and reproducing algorithms you have learned.

Nope. If those algorithms represent the trade secrets of your former employer then it is illegal to disclose them. For example **undisclosed** details on when to bid and how much to bid given market conditions.

General knowledge is transportable. How to optimize C and assembly code, how to optimize network communications, **publicly available** details on when to bid and how much to bid given market conditions.

not a "recommendation"

[MarkvW]

The Second Circuit is TELLING, not asking, the lower court to enter a judgment of acquittal. The feds only hope is a successful supreme court apppeal.

Casio Royale

[Dogtanian]

Or on a Casio Boat like in Missouri

Casio are running gambling boats?! Makes a change from their usual electronic devices, I guess...