Sleight Of Hand, Blows Up In Face

Over the weekend a Russian immigrant named Sergei Aleynikov was arrested for allegedly stealing the computer trading codes to the automated trading software of one of America's largest megabanks: 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.

The criminal case began to unfold on the evening of July 3 when Aleynikov was arrested by FBI agents at Newark Liberty Airport, after returning from Chicago. Aleynikov had just started a job with another firm in Chicago, after leaving the big firm in NY in early June. It appears the financial institution allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.

On July 4, Aleynikov was processed on a “theft of trade secrets” charge in a criminal complaint that was filed in federal court in Manhattan. As of this afternoon, he was still being held in federal custody pending posting of bail.

A Goldman spokesman declined to comment on the incident. A spokeswoman for the US Attorney in the Southern District of New York didn’t comment. Authorities reportedly took all the computers from Aleynikov’s home in New Jersey.

If Goldman's automated trading system was compromised by a former employee like this, who knows how safe those automated trades were. I'm thinking the last thing Goldman Sachs wants to see is the naked corpse of their automated trading code stripped out in federal court, especially given the sheer volume that these automated programs process in a day. Literally billions of dollars change hands daily through these programs, and opening the hood is not something Goldman Sachs is going to want.

I'm also thinking that given the banking regulatory climate, I don't think they have much choice. This case could get very, very interesting.

Tyler Durden at Zero Hedge has the goods:

Back-up: 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.

Even more odd, this "disappearance" comes hot on the heels of what Zero Hedge reported could be potentially a major change to the way the NYSE provides its weekly program trading report. Of course, Ray over at the NYSE immediately replied to Zero Hedge that all was going to be same as always ... Odd, maybe he meant that all is back to normal except the reporting of Goldman's trades. Either way, it might very well be time for proactive readers to again contact the two employees publicly disclosed by the NYSE as lead-contacts on the issue. Readers will recall that it was these same two who were previously steadfastly assuring anyone who would listen that there would be no change at all in data reporting.

Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 or
Aleksandra Radakovic, Vice President, NYSE Regulation at (212) 656-4144

Alas, the just released weekly data proves that either theirs was a material misrepresentation of facts, or Goldman simply suddenly decided to stop transacting with the NYSE, or, what would be even more sinister, Goldman notified the NYSE to scrap all their trading data from the prior week. Why would they do that?

Considering Goldman Sachs is already under the press microscope thanks to Matt Taibbi's excellent reporting, things just got a whole hell of a lot worse for the banks. If this blows up into a major scandal involving program trading being used to manipulate the markets, this could be the extinction-level event for the dinosaur megabanks.

You'd better believe I'll be keeping a close eye on this one. You should too.

[UPDATE 12:01 PM] Yves Smith over at Naked Capitalism notes that Goldman Sachs is back to playing three-card monte with its toxic assets again. Just how much damage is this company doing to the global economy on a daily basis?