Is Goldman Sachs doomed? (Yes, it's a serious question!)

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.

tht would explain the millions of $$ thy are making in quant trading. There was even talk of increased bonus's in 2009 vs 2008!

Can thy even do this ? Isnt sniffing packets illegal ?

From DKOSer Ezekial:

...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.

Two things come out of this:

1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...

(2. ... is way off point....)

SUMMARY:

Goldman Sachs may just possibly have used security access codes and built a system to acquire trading information PRIOR to transaction_commit time points at NYSE.

The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day.

Then, seems one Sergey Aleynikov got himself arrested. NYTimes says its about "secret sauce" Goldman Sachs quant math. We'll consider Mr. Aleynikov's STORM patent with distributed processing agents. Recalls Triple Hop's text indexing tools. Nothing to do with quant math.

The big ticket, the magic wand for a rogue quant shop is technology to grab off FIX PROTOCOL, OCX, or SWIFT messages that precede every transaction_commit at the Exchanges.

Grabbing information is way hotter for conquering Wall Street than owning a crystal ball.

...

Nice telecom system control. Uses servers -- or cycles at the switches -- to monitor packets in real time. One big trick is getting this software to run on the distributed assets of the system -- which in turn depends on getting the passwords to the switches, which can be changed daily.

If you've got a way to get the passwords, the implementation software for this STORM system is perfect for installing programs to capture text streams.

Front-end messaging for NYSE is done with small text messages. FIX Protocol messages are tiny things -- less than a k. Encryption is optional or nonexistent or easily enough made transparent. NYSE has any and all access codes involved.

...

These trade events happens out in the front-end, prior to communication of the data to the Exchange. Messages go through the internet, local networks and sit on middleware application servers, as well as being stored on databases. FIX and SWIFT are compatible -- the aim of these systems is to make trading efficient, moving to support Straight Through Processing (STP.)

Access to FIX, OCX or SWIFT messages prior to transaction_commit at the Exchanges would give a player an advantage parallel to seeing an opponent's cards in a game of poker.

Can thy even do this ? Isnt sniffing packets illegal ?

God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!

God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......

This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can "see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous mode" and SILENTLY sniff that traffic!
ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION.....

Folks, I have no way to know what the code in question does, but if there's anything to this - anything at all - there is a major, as in biggest scam of the century - scandal here - something much, much bigger than Madoff or Stanford.
What would this mean, if it was all to prove up?

It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute messages - before they were committed in the transaction stream. Such a "SNIFF" would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.

The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively "stealing pennies" from each transaction they were able to front-run.

Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had "special network access." Nothing. All I have to go on with regards to "market manipulation" (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.
This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos. But consider the following:

The last few days the the market has traded "organically." I and many other market participants have noted that prior to the week before July 4th the market had been acting "very odd" - normal correlations between interest rate, foreign exchange the the stock markets had been on "tilt" for the previous couple of months, with the amount of "tiltage" increasing dramatically in the last three or four weeks. In fact, many of my usual indicators that I use for daytrading had become completely useless. Suddenly, just before the July 4the weekend, everything started correlating normally again. I have no explanation for this "light-switch" change but it aligned almost exactly with the day the NYSE had "computer problems" and extended trading by 15 minutes. Was there a configuration change made to their networking infrastructure, one asks?

Zerohedge's information, if you believe it, seems to point toward some sort of distortion. The cite above claims statistically "as likely as an asteroid hitting earth it is not true" proof of distortion in the market. I have not analyzed the data to independently validate that conclusion, but even if the odds of these "effects" in the market being random chance are only as good as getting hit by a tornado this afternoon......

Every market participant deserves answers on this point. Specifically to the NYSE and all other markets where colocation connections are made and allowed:

1. Was it possible for message traffic to be "seen" by computers on your network and colocated into your infrastructure by other than the originator and recipient? That is, was it physically possible for anyone to "sniff" messages to and from other market participants.
2. If it was possible, is it no longer possible, and if so, when was that change made?

I believe the SEC and FBI must direct a subpoena at all market exchanges for an under-oath answer to question #1. If the answer to that question is "yes" then every market participant who had or has equipment colocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed "sniffing" traffic and front-running orders.

The charge made on the pages of Daily Kos is incredibly serious. If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

Market participants deserve an answer to these questions.

i'm really surprised no one else besides you and me have hopped on to this issue.

if a major market player can manipulate the markets through a computer algorithm, this is just really really bad.

the markets are beginning to resemble a rigged slot machine that always favors the house. and that's goldman.

https://www.bloomberg.com/apps/news?pid=20601087&sid=aUHZ0H2Pqtr4

Did anyone else hear the rumbling about GS loading up on GOLD DECEMBER contracts ?

July 9 (Bloomberg) -- Goldman Sachs Group Inc. is on track to beat its 2007 trading-revenue record, enabling it to boost compensation by an estimated 64 percent from last year, according to Bank of America Corp. analyst Guy Moszkowski.

The very fact that GS was gona give bigger bonus's this year made me think....there is no smoke w/o fire. With Lehman out of the way... GS pretty much rule the roost.

Which school does GS get their "bright ppl" from.....
I am lining up!

July 10 (Bloomberg) -- Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer arrested last week for stealing software, told an FBI agent he uploaded proprietary code to an encrypted server he had used on “multiple occasions.”

Aleynikov, 39, told the agent around 1 a.m. on July 4 that he had logged into Goldman’s computers through remote access from his home and sent encrypted files to a repository server with the URL identifier svn.xp-dev.com, according to a copy of his FBI statement in court files in Manhattan federal court.

...

Assistant U.S. Attorney Joseph Facciponti said at Aleynikov’s arraignment July 4 that the alleged theft is the “most substantial” that the bank can recall.

...

In the statement, Aleynikov laid out what had happened from the downloading of the files to their transfer to the server and his retrieval of them from it. He said that on June 5 he “created a tarball in an effort to collect open source work on Goldman Sachs server to which I had an account.”

Tarball

A tar file, which is sometimes called a tarball, is a compressed file.

“I had previously worked on the files,” he said.

He said he encrypted the files, then erased the encryption software and the tarball.

“I then erased the bash history,” he said, referring to a method of recalling commands used in previous computer sessions.

Goldman security measures prevent such deletions, which tipped the firm off to his activities, prosecutors said.

Aleynikov said in his statement that he downloaded the Goldman software to his home computer, his laptop computer and his thumb drive.

“The reason I uploaded to svn.xp-dev.com was because it was not blocked by Goldman Sachs security policy,” Aleynikov wrote. The phrase, “not blocked by Goldman Sachs security policy,” was crossed out and he added: “I wanted to inspect the work later in a more usable environment.”

More Than Intended

Aleynikov said that he later opened the files to inspect them.

“At that point I realized that I downloaded more files than I intended,” he said.

Aleynikov, who lives in New Jersey, was arrested on July 3 after arriving at Liberty International Airport in Newark. He was charged with stealing the trading software and is free on a $750,000 bond.

Teza Technologies LLC, a Chicago-based firm co-founded by a former Citadel Investment Group LLC trader, said after his arrest that it had suspended Aleynikov, who started there on July 2. Aleynikov had told co-workers at Goldman that he was joining a new firm at triple his salary of $400,000 a year.

Michael DuVally, a spokesman for New York-based Goldman, declined to comment.

Aleynikov said Teza wasn’t involved. “I have signed an agreement with my new employer not to bring any unlicensed software,” he said. “I have not violated that agreement.”