Zerohedge has been covering the Sergey Aleynikov story and some very strange details are emerging. It seems there is some proprietary code for high frequency trading which is amazingly profitable, as in too profitable.
From the Wall Street Journal:
In a commentary Thursday Iati offers some thoughts about how important algorithmic trading has become to the market. His conclusion hints at the significant power of the programmers.
“Electronic routing and execution has become the mechanism by which our capital markets operate. Algorithms account for more than 25% of all shares traded by the buy side today—a number steadily rising for several years now. However, the incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize. The familiar names of Lehman, Bear and Merrill are being replaced by less familiar ones like Wolverine, IMC and Getco.”
Iati notes that high-frequency trading firms include proprietary trading desks for a small number of major investment banks. Only 2% of the nation’s 20,000 trading firms in the U.S. markets, they account for 73% of all U.S. equity volume.
These funds are designed to “capture profit opportunities by being smarter and faster than the closest competition. They are, as a rule, secretive, stealthy, smart, and relatively unknown. The key to being smarter is their unique technology that enables them to profit on a number of these quantitative strategies, which they will protect at all costs.”
The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets.
Now is Goldman Sachs trying to protect a now exposed backdoor method of intercepting trades and thus manipulating markets as some of the blogs are implying and speculating?
Well, I don't know frankly if GS or any of these hedge funds did something illegal. That said, any good engineer knows to analyze a problem in order to innovate the work around. What I can believe? Regulation has not kept up with technology which adds new meaning to the term loophole (pun intended for all software engineers reading this).
Obviously the smart thing to do here is regulate actual software design for financial systems and applications, what it can and cannot do in trading platforms. But that requires consulting the geeks, which is something D.C. never seems to want to do. Nope, instead of incorporating actual hard science into other policy areas, odds are we will simply get more breathing down the necks of every computer savvy person out there who managed to land one of these decent paying jobs.
Perhaps it is prudent to consider consulting some of our long time DARPA and NSA and other experts instead and put regulation into the software itself.
Previously I mentioned a strong need to regulate the derivatives' mathematical models themselves. Now we have this.
If any aspect of this breaking story is true and Goldman Sachs is simply using software to manipulate markets and trades...let's state the obvious: Geeks are not just for kicking around and trying to offshore outsource their jobs.
Bloomberg is catching onto this story. Again, note the black box of software architecture and the lack of technical expertise to determine what is going on exactly.