Did Goldman Sachs' Secret Trading Codes Get Out? (GS)

Goldman Sachs Group Inc. (NYSE: GS) is said to have either the best in-house and proprietary trading models or at least the best of the large bulge bracket firms.  This weekend came a report from Reuters that a Russian immigrant living in New Jersey had been arrested on federal charges of stealing the secret trading codes from what is believed to be Goldman Sachs.  More specifically, it was noted as the automated stocks and commodities trading operations.  Authorities said the codes were uploaded to a German-based website that are worth millions in profits use top secret mathematical formulas.

Sergey Aleynikov is the suspect that Reuters said was under arrest and he had just started a job with another firm in Chicago, after “leaving the big firm” in New York in early June. This report also noted that it appears the financial institution “allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.”

Regardless of how this pans out and how it is reported, this is not the first and will not be the last of trade secret theft or corporate espionage on Wall Street.  The problem is that many firms do not like to report that they have been victim of such activities.  Many trading firms try to legally reverse engineer the methods of others after they figure out what trades were being made.  That is the legal way and difficult way to police.  Sometimes this done with former employees and sometimes this is done from calculations and counter-party trades.

Guess which firm is almost always in the top firms in program trading? Goldman Sachs.  There has been a recent change to this reporting, and it is unknown if this was due to this incident or not.  But this program and automated trading is also what has helped Goldman Sachs beat out its competition as well.

We have started inquiring around with our own contacts to see if this may have hit the company or had any significant impact on Goldman’s automated trading operations.  So far, that is not known.  At least not on the outside.

Jon C. Ogg
July 6, 2009