A trial has just ended that had at its heart “software that could be used to manipulate the market in unfair ways.”
Sergey Aleynikov, a computer programmer, is accused of stealing Goldman Sach’s computer code when he left the company in July 2009. Somehow, Goldman got the FBI to arrest Mr. Aleynikov within 48 hours after they realized he had stolen their software algorithms. Such a feat is impossible for mere mortals, but not for Goldman. Even more impressive is how the FBI and the prosecutors have jealously guarded the purloined proprietary code as if it was Fort Knox.
At the time, Goldman said that the stolen software could be used to “manipulate the market in unfair ways”? If that’s the case, exactly what was Goldman doing with the software in the first place? And why is the government protecting the software instead of examining it to determine how it could be used to manipulate the market?
Aleynikov’s second trial just ended and the court is awaiting a jury verdict. (After Aleynikov was convicted in his first trial and spent a year in prison, his federal conviction was overturned on appeal. New York State decided to try him again. Hence, the second trial.) The problem with the trial is neither the defendant nor what he did or did not do. The bigger problem is what he allegedly stole. Many market observers are tuned into this case because they are convinced that our markets have been overtaken by fraudulent high frequency trading.
Our market watchdogs, through incompetence or a conflict of interest, have effectively allowed large investment banks and hedge funds to prey on investors. Not surprisingly, high frequency traders are doing an outstanding job in their depredations. If one googles ‘high frequency trading’, he or she will see numerous articles and videos decrying its use in ripping off mutual funds, pension funds, and retail investors. If you look at the statistically impossible consecutive winning trading days and the obscene profits generated at the proprietary trading desks of large Wall Street investment banks and hedge funds, you will understand why there is a crime behind every fortune. The high frequency trading company, Virtu Financial, had only one losing trading day in a six-year period, which is statistically impossible. In fact, the odds of this happening are astronomically improbable. Either high frequency traders are cheating or they have developed algorithms that endow computers with psychic powers heretofore unknown to humanity. If the village idiot can figure out that high frequency traders must be cheating on an intergalactic scale, so should the Securities and Exchange Commission. It could not be more obvious. If the SEC is not regulating and overseeing our capital markets to ensure a level playing field, why are they still in existence? Where are the cops?
The ongoing scandal that remains below the radar screen for most Americans is that high frequency traders illegally manipulate the market with impunity using computers and software. For high frequency traders, it is like shooting goldfish in a bowl where investors happen to be the goldfish. If an individual tried to manipulate trading in a penny stock, he would be arrested in a heartbeat, but the same treatment does not apply to well-heeled firms who traffic in similar schemes. A penny trader has no friends in high places but big Wall Street firms do. The government is trying its utmost to keep a lid on the mega-scandal in high frequency trading and has been successful so far. At some point, however, the wheels will fall off because it is so massive and so pervasive.
During Aleynikov’s first trial, the government prosecutors asked the judge to close the doors on the public when sensitive details of high frequency trading were discussed during the trial. This tells you all you need to know about how far the government will go to protect the interests of Goldman and, by extension, other Wall Street firms. Why do prosecutors want to imprison someone whom they claim stole computer software, which itself may have been used to steal hundreds of millions of dollars from millions of honest investors?
Exactly what does the computer code that Aleynikov allegedly stole from Goldman do that would allow it “manipulate the market in unfair ways”? Let’s see the smoking gun.
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