Tuesday, July 7, 2009

Inside the Goldman money machine

Business Times - 07 Jul 2009

Ex-employee charged with stealing secret computer codes that help the firm generate millions of dollars in profits each year

By MATTHEW GOLDSTEIN

DID someone try to steal Goldman Sachs' secret sauce? While most people in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, allegedly tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend that 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 gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.

The criminal case has the potential to shed light on the inner workings of an important profit centre for Goldman and other Wall Street firms. The charges also raise serious questions about the safeguards that Wall Street firms deploy to protect these costly- to-build proprietary trading systems.

The criminal case began to unfold on the evening of July 3, when Aleynikov was arrested by FBI agents at Newark Airport after returning from Chicago. Aleynikov apparently had just started work with another big firm in Chicago after leaving his previous employer in New York in early June. It appears that the financial institution allegedly victimised 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. As of Sunday morning, he was still being held at the Metropolitan Correction Center in Brooklyn.

A Goldman spokesman declined to comment on the incident. Calls to Aleynikov's home in New Jersey, which he shares with his wife, were not returned. A spokesman for the United States Attorney's Office in Manhattan did not comment.

The Federal Bureau of Investigation, in charging Aleynikov, says he began working for the major financial institution in May 2007 as a computer programmer and left in early June. That matches the description of a man named Serge Aleynikov on the social networking site LinkedIn (the difference in spelling of the first name could not be immediately explained).

Ballroom dancer

The biographical information for Aleynikov on LinkedIn says he joined Goldman in May 2007 and was vice-president for equity strategy. The bio says he was responsible for 'development of a distributed real-time co-located high-frequency trading platform'.

The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms. Goldman was often at the top of the chart - far ahead of its competitors.

It's possible Goldman had asked the NYSE to stop reporting the number after it discovered that someone may have infiltrated the proprietary computer codes it uses.

Here's the way the criminal complaint describes the Goldman trading platform: '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.'

Federal authorities appear to believe Aleynikov may have had help. The German website that he is accused of uploading the stolen information to is registered to a person in London.

While the case is still unfolding, there is more information to unearth about Aleynikov. For instance, it appears that he and his wife are competitive ballroom dancers - there are videos of them on YouTube.com.

Many questions remain. Which Chicago firm hired Aleynikov? The job he took in Chicago, according to the criminal complaint, paid nearly three times more than his US$400,000 salary at Goldman.

Also there's more to learn about anyone who might have been helping him and the fallout the case may have for Goldman.

When he was arrested, Aleynikov told the FBI he 'only intended to collect 'open source' files on which he had worked, but later realised that he had obtained more files than he intended'. Quick, get this guy a good lawyer.

One question investors need to ask is whether this incident will have any impact on Goldman's second-quarter earnings.

The alleged wrongdoing by Aleynikov took place at the beginning of June - although it's not clear if it had any material impact on automated trading. -- Reuters

Matthew Goldstein is a Reuters columnist. The views expressed are his own.

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