Is Goldman this vulnerable??

By: ispeculatornew
Date posted: 07.08.2009 (5:00 am) | Write a Comment  (7 Comments)

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legal-issuesYou have perhaps read the story already, the story of a Russian-American computer programmer who was formerly employed by Goldman Sachs and is now held responsible for stealing much of the code behind a portion of their automated trading. Surprising? Not really, but still surprising to see the world awake to this news. It’s no secret, many firms around the world use “program trading”, or “black box trading” which usually works in one of two ways. Either the program will be looking for market inneficiencies or arbitrage possibilities and quickly execute the trades making a small profit. For example, a company could buy the stock of “Canon” in the US and then sell it in Japan. If after the fx trade is done, their is a profit, then there was an arbitrage possibility. Of course, the name of the game in such trading resides in the actual coding that tells the computers how to trade.

It seems that this programmer has transferred the code and Goldman Sachs is now very worried about the idea of finding the code made available on the internet. This would instantly make hundreds and thousands of institutions aware of how exactly Goldman is trading (on this particular program) and would make it easy to replicate. Of course, once that happens, the program that currently makes millions every year might become a lot less profitable.

The case is certainly interesting but it brings up even more questions. How in the world can a company protect itself from such cases happening. Probably the easiest way is to pay its employees well enough for them not to ever be tempted, but even that has its limits. It is becomming increasinly difficult for companies (not only financials) to protect their corporate secrets as they are always one upload away from a major disaster. I would personally predict that over the next decade we will see many more cases such as this one and that the topic will become increasingly important.

If a trading program or software code can be sent away with a simple click, it becomes very very difficult for companies to monitor the activity an employee and makes you wonder if simple individuals could destroy important revenue sources or even worse, put their companie’s future in jeopardy. Of course companies such as Goldman Sachs in this case will always have the possibility of legal recourse (as they do now), but that still has its limits….

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7 Comments

  1. Comment by SJ — July 8, 2009 @ 9:48 am

    When I worked @ LM certain areas did not have internet, only intranet. i.e. allowing for code testing but making it difficult to transport.

    I guess they could ask other defense contractors how they do it =)

  2. Comment by Frank — July 8, 2009 @ 11:02 am

    Heard the news! Quite crazy!! It didn’t know that a trading program can jeopardize a company like GS. It would be certainly dangerous if that the trading program could be used to manipulate the market…

    We’ll see next GS’s quarter results !!!!!?!?

  3. Comment by Catarina — July 8, 2009 @ 11:12 am

    Maybe by now the codes can be downloaded at Pirate Bay hehehe

  4. Comment by Zavi — July 8, 2009 @ 1:24 pm

    haha good one Catarina…

    Goldman Sachs admits its software can “Manipulate markets in unfair ways”. huh? Is it supposed to be illegal? Like anybody can manipulate markets in a fair way? As an individual investor, we should be protected from a trading program that can manipulate the market. How can we protect ourselves?

    IS, yes it has its limits: how can Goldman Sachs expect to hold onto billions of dollars earning algorithms and pay key personnel only $400k per year, and maybe a bonus?

    I will not shed a tear for GS.

  5. Comment by IS — July 8, 2009 @ 9:18 pm

    @ SJ.. I might be low here but what do you mean by LM??

    @ Frank – I have a bit of trouble with that argument, if it is used that way, then you’d think Goldman is already doing that.. and if that’s the case, then that’s bad by itself, no matter who does it no?

    @ Catarina – LOL.. will have to go take a look:)

    @ Zavi – yes I see your point but still think companies will need to address this concern in the coming years…

  6. Comment by Frank — July 9, 2009 @ 7:35 am

    I’ve been sarcastic about that… I hear you. If GS can manipulate the market, why can’t the others do it too?

  7. […] from momentum and even in some cases (although few would admit to this), to manipulate markets. The recent arrest of an ex-Goldman employee as long as many reports about how Goldman has mastered this form of trading had placed very high […]

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