Will Goldman Sachs Data Theft Scandal Bring Down High Frequency Trading?

Early this month, Tyler Durden of Zero Hedge reported on the case of Sergey Aleynikov (pictured above), a former employee of Goldman Sachs who allegedly stole the code that runs their automated high frequency trading system. As I noted earlier today, this is software that allows firms like Goldman Sachs to see trades before they hit the market and make their own trades before they post.

Well, this could have been the catalyst for the recent focus on high frequency trading and may ultimately lead to its downfall.

Here’s more from Zero Hedge on July 5th:

The plot thickens: per FBI agent Michael McSwain’s sworn deposition, Sergey quit a firm described as “Financial Institution” in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Matt reports, he proceeded to move to a Chicago firm engaged in “high volume automated trading” where he would make 3x his $400k salary. [...]

In the 5 days immediately preceeding his departure from “Financial Institution” (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain’s affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this “code” not only to Goldman but to the highest bidder. After all, from the affidavit: “certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.

What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.

Now, before this time, very little was known about high frequency trading except that trades were available to view for milliseconds before they posted and it had been that way since 2005. But after Goldman filed this complaint and went after Aleynikov, bloggers and reporters started digging and now we're seeing Chuck Schumer calling for the practice to be banned...a move I wholeheartedly agree with. High frequency trading or "flash trading" is a practice that only monied, powerful firms can take part in and it puts day traders at a serious disadvantage if firms like Goldman can put in trades before everybody else, even if they didn't place the order first. That's craziness and how anybody thought it was okay is beyond me.

Here's the question: Will high frequency trading be outlawed?

(Photo: About-Knowledge)