Sergey Aleynikov, a computer programmer, is accused of stealing Goldman Sach’s computer code when he left the company in July 2009. His trial is about to begin. See “What We Are Not Supposed To Know“. The problem with the trial is neither the defendant nor what he did or did not do. The 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. See “The Market Is Cornered” for a discussion on why their concerns are warranted.
Our government, through incompetence or a conflict of interest, has 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. 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 you will understand why there is a crime behind every fortune. 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 a galactic 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?
It is a natural human reaction for Americans, who struggle every day to put food on their table and a roof over their heads, to be incensed at the arrogance of Wall Street firms who insist on huge salaries and bonuses no matter how much damage they inflict on the economy. What is more difficult to stomach is the fact that our government actively protects the interests of the banksters at every turn. Americans see the injustice when banks are bailed out and given guarantees that make a complete mockery of the concept of moral hazard. Americans are offended when they see our government regulatory agencies littered with former Wall Street employees. They seethe when they watch Wall Street CEOs parade into and out of the White House as if they own the joint. Americans consider it an affront when they see representatives of the major banks sitting at the table of the Federal Reserve and dispensing advice that serve their self-interest at the expense of Main Street Americans. See “Triumph of the Plutocrats“.
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 whole thing will spin out of control because it is so massive and so pervasive. If all of the testimony at the Aleynikov trial is made public, the case might present some further insight into the abuse of high frequency trading. Government prosecutors have asked the judge in the case to close the doors on the public when sensitive details of high frequency trading are 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. It does not take a rocket scientist to know that the public would be enraged if they learn through hard evidence that they have been ripped off by Wall Street once again. Investors will lose any confidence they have left in the market if they learn that Wall Street has been stealing pennies from them in high volume using computer programs. The wrath of investors will fall hardest on the government who is zealously encouraging and protecting Wall Street at the expense of Main Street Americans. Who cares about market liquidity if it means a debasement and corruption of our capital markets for the express benefit of a few trading firms on Wall Street? By the way, the liquidity provided by high frequency trading is ephemeral and could evaporate in a matter of seconds should an imbalance between buy and sell orders occur, as it did during the flash crash on May 6th. See “High Frequency Trading: A Trilogy of Angst“.
It would be interesting to hear how high-priced Wall Street lawyers defend high frequency traders if the government is pressured by the public to indict the culprits who are in violation of 1934 Securities Exchange Act, which prohibits market manipulation. Perhaps, it is impossible for the government to file charges because they themselves are complicit in the crime. How do you bring lawbreakers to trial when it can be shown that federal prosecutors themselves were in the tank for Wall Street defendants in the past? The high frequency software code that Aleynikov allegedly pilfered could be exhibit number one in such a trial. How do federal prosecutors explain away the fact they sought to imprison someone who stole computer code which itself was used to steal hundreds of millions of dollars from innocent investors. Sometimes the hunter is captured by the game. High frequency trading may be a case where the government has let the wise guys on Wall Street box them into a corner. The government is damned if they indict them and damned if they don’t. That is what happens when good judgment takes a backseat to big money.
Stay tuned. Evil eventually destroys itself. We are still in the first inning of a game that has a long way to go.