I’ve sat on the Sergey Aleynikov news for a week now, but with Reuters reporting today that Citadel, the $11-billion hedge fund firm, has joined the fray, I thought that this industrial espionage story has entered a more interesting phase. Here's the excerpt from Reuters:
Citadel Investment Group, one of the world's most powerful hedge fund firms, sued a former top executive in its highly successful quantitative trading unit and two others for setting up their own firm.
Chicago-based Citadel, founded by 41-year-old billionaire Kenneth Griffin, said in a lawsuit filed on Thursday that Mikhail Malyshev and two other former employees had violated their noncompete clauses by starting their own firm, Teza Technologies LLC.
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Malyshev, a Russian emigre with a doctorate in astrophysics from Princeton, left Citadel's quantitative trading unit in February after the funds he helped run returned about 40 percent last year. Their performance stood out at a time most hedge funds lost money and Citadel's flagship portfolios tumbled 50 percent.
Now, this Reuters report caught my attention because it was the start-up firm, Teza Technologies, mentioned above which Sergey Aleynikov joined after leaving Goldman Sachs in early June.
I guess you know by now what Aleynikov did before leaving his employer on June 5: On four occasions between June 1 to 5, Aleynikov used personal passwords to download, from his desktop computer at Goldman's New York offices, 32 megabytes of ultra top-secret Goldman Sachs quant trading proprietary code, which he then encrypted and uploaded to a website in Germany, with a UK owner.
To make a long story short, Goldman learned about Aleynikov's deceit around mid-June, but waited until July 1 to notify federal authorities about the code theft. Things happened quickly after that, with federal authorities arresting Aleynikov at the Newark Airport on July 3 and filing the appropriate criminal complaint against him the following day (incidentally, a holiday). Aleynikov is presently out on bail, after posting the required bond on July 6.
Anyone can possibly read any sort of plot in this story (the blogosphere, for example, is abuzz with speculations about international espionage and other conspiracy theories). What stares me in the face, however, is a boringly recurring theme since biblical times--the frailties of human nature at work again. Matthew Goldstein, the Reuters columnist who broke the news on the Goldman trading scandal, expressed this best in the following excerpts:
Management at Goldman should wonder whether its great success at so-called quantitative trading has spawned a degree of jealousy among the computer geeks who make nice salaries, but don't receive the kind of big bonuses that investment bankers and prop traders take home.
After all, as federal authorities say in the criminal complaint filed against Aleynikov on July 4, the trading platform the 39-year-old Russian immigrant worked on will "typically generate many millions of dollars of profits per year." Bonus envy is certainly bound to crop up with someone working on a trading system that's almost literally printing money.
It's a valid observation, which could very well have pushed Aleynikov to grab Teza Technologies' offer to triple his $400,000 annual salary at Goldman Sachs and steal the top-secret proprietary codes of its money machine. The prospect of profiting from the combined secrets of Goldman and Citadel, coming up with a better trading platform that would outperform both players, and cornering the program trading market was probably simply too much for Aleynikov's ego to refuse.
This thought troubles me as I revisit what Lisa Endlich said about Goldman Sachs’ business in her book about the partnership (at the time). That it's a business “where almost all of the assets go down the elevators and out the front door each night” is as true today as it was in the 1980s when she wrote her book about the investment bank. Indeed, people are an investmet bank's most important assets. Unfortunately, they could also be its soft underbelly, like what Aleynikov has just recently reminded us.
(Photo credit: Google Images)
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UPDATE - July 10, 2009
Bloomberg published today more details about how Aleynikov stole the Goldman Sachs proprietary codes. Click here.
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My blog was mentioned and briefly quoted in Steve Rhodes' report in NBCChicago.com, as follows:
As noted by the blog An Investment Banker's Take On Life, "Anyone can possibly read any sort of plot in this story (the blogosphere, for example, is abuzz with speculations about international espionage and other conspiracy theories)."
2 comments:
The part I do not quite understand is how some other firm would be able to properly utilize this code. I assume front running involves before the fact knowledge of orders, not detecting after the fact patterns in executed orders.
According to the stats, GS is responsible for 40% of the program trading activity, so it can front run against its own clients. Who else has access to that large a body of order executions? How do the ‘markets’ get manipulated?
So, is this a smoke screen to lock down the code as it will reveal something different about its purposes? Theft of IP shows GS has been harmed and justifies preventive actions - why the need to warn about the possibility of a financial WMD?
http://beaconintegration.com.
I’m neither techie nor trader, but in my considered opinion, acquiring GS's front-running capability overnight is not the motivation here. You are right: front-running requires before-the-fact knowledge of orders. I believe no firm would be stupid enough to believe that they can do the equivalent of “plug and play” with this code, and that GS would not, among others, counter attempts to access the databases (client orders?) and information streams (NYSE itself?) fueling its top secret trading program.
I feel very strongly against market "manipulation", but I don't have enough basis to figure out how this could be done (or is being done) in Wall Street in this age of "block-box" trading.
As to your last point about this being a smoke screen to something, welcome to the Wall Street Conspiracy Theorists Association. LOL
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