

Did someone try to steal Goldman Sachs’ secret sauce (source code)? - hachiya
http://blogs.reuters.com/commentaries/2009/07/05/a-goldman-trading-scandal/

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staunch
Don't forget that Goldman has every incentive in the world to hype the
importance of the code, so that they can use the FBI to punish this guy. This
almost certainly could have been handled with a lawsuit.

Surely they've had people quit to work for competitors in the past. People who
knew exactly how their code and current strategies operated. All this guy did
was actually copy the code, which is clearly IP infringement, but not
necessarily so much more damaging in practical terms.

Don't underestimate the vindictiveness and competitiveness of these financial
guys.

~~~
smanek
I don't know if they want to hype it that much. They are a publicly traded and
looking unnecessarily weak could cause a huge unwarranted dip in their market
cap (which they have a fiduciary responsibility to prevent).

~~~
jonknee
Maybe they have already shorted their own shares.

~~~
quizbiz
I have always wondered if brokers are allowed to trade stocks of their own
firm.

~~~
dandelany
Yes, as long as they do so based solely on material, public information and
report all transactions to the SEC.

Obviously, this is nearly impossible to police.

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dandelany
According to the NYSE's program trading report:

<http://www.nyse.com/pdfs/PT06.15.09.pdf>

Program (or quant) trading accounted for 40.4% of _all_ NYSE trading volume
during the week of 6/15 - 6/19. Goldman's program accounted for the more of
this than any other firm, almost 1.2 billion shares, or 20.6% of all program
trades. Ostensibly, this guy made off with the algos responsible for (.206 *
.404 =) 8.3% of _all_ NYSE trades. It's quite possible this is the world's
most valuable source code. There are lots of people claiming that the code is
useless without their infrastructure, but knowing exactly how GS makes their
trading decisions allows anyone who holds the information to engage in front-
running, or set traps for them by pushing stock prices one way or the other in
order to trigger their system to buy or sell.

Even stranger, the report for the following week:

<http://www.nyse.com/pdfs/PT06.22-06.26.pdf>

shows an incredible increase in quant trading share, making up 48.6% of all
NYSE trades, but Goldman isn't even on the list (after leading it the previous
week). NYSE claims this is an error:

[http://zerohedge.blogspot.com/2009/07/new-york-stock-
exchang...](http://zerohedge.blogspot.com/2009/07/new-york-stock-exchange-we-
screwed-up.html)

Surprisingly, GS is up 2% on the day.

<http://www.google.com/finance?q=GS>

Something majorly fishy is going on.

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hachiya
Further commentary at: [http://zerohedge.blogspot.com/2009/07/is-case-of-
quant-tradi...](http://zerohedge.blogspot.com/2009/07/is-case-of-quant-
trading-industrial.html)

    
    
      > Major developing story: Matt Goldstein over at Reuters may have just
      > broken a story that could spell doom for if not the entire Goldman
      > Sachs program trading group, then at least those who deal with "low
      > latency (microseconds) event-driven market data processing,
      > strategy, and order submissions." Visions of swirling, gray storm
      > clouds over Goldman's SLP and hi-fi traders begin to form.

~~~
nopassrecover
Sounds like an excuse to fire a department they can no longer afford.

~~~
nopassrecover
Er, okay. The point is that this does not have to spend the end for this
program.

~~~
nopassrecover
Er spell the end _

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ShabbyDoo
Here's what's not clear to me... Was the code simply a low-latency platform
for making arbitrary automated trading decisions, or did it include trading
strategies as well? hachiya's link suggests that the major value was the
microsecond latency of the platform. If that's the secret sauce, I would think
it could be replicated without resorting to espionage.

~~~
profquail
It's really both. Data comes in from various sources with low latency (you get
the data right as trades happen, not the 15-minute delay you'd get at Yahoo
Finance or something), then the system runs the data through various trading
models they've developed and makes trades automatically.

Once a competitor gets their hands on your model, you might as well trash it,
since they could use it against you; and places like GS spend BILLIONS on
their models, so if this guy really got all (or even just some) of their
source code out, the firm is going to take a big hit, and it's not just going
to be a short term bump in the road either.

~~~
mustpax
I disagree about the short term bump part.

Quant trading algorithms, like most stochastic trading approaches, lose their
effectiveness over time as the market internalizes them and as knowledge
dissipates naturally (not necessarily through leaks). The best of the best
individual quant trading algorithms have a half-life that does not exceed one
month. And we're talking exceptional here. Also, at any given time many, many
algorithms will be running simultaneously; complementing, overriding eachother
as necessary.

So there's a lot of churn overall. The code that someone picks up in this way
contains a single snapshot of this transient trading strategy, not
particularly useful to run on their own. You're right that, what really sucks
for Goldman is that someone could find some basic patterns inherent to their
trading platform and trade "against" Goldman.

The catch is that this sort of maneuvering happens all the time. Sure it's
going to be painful in the near term for the Goldman quant guys, but they
don't need to start from scratch necessarily.

~~~
mediaman
I think it can last longer than a couple months. I worked on some relative
value trading algorithms in connection with work that a b school prof was
working on, which got picked up by some of the major HF players. It continued
to work for a couple years before the correlations faded away.

~~~
rjurney
Do these things really work, or are they random and software validates a
belief in them?

~~~
rdtsc
It's the low latency that works more than the actual trading algorithm.
Algorithms eventually get diluated into the market as there are so many of
them.

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zandorg
Codes? The plural for 'code' is 'code' not 'codes'!

I can't believe Reuters is talking like a warez kid.

~~~
cvg
Isn't this the British English version of code? I think I've seen it elsewhere
in British press.

~~~
aka-
I'm British and codes would be used for cryptographic codes or voucher codes,
but not in programming. Files full of C++ are code, not codes.

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ShabbyDoo
>at that time earning $400,000 annually

I really, really need to leave the Midwest. He was basically a dev lead?

~~~
gaius
A "quant" is a trader who writes his own trading software. It's easier for
them to do this than to write a spec for someone else, especially since it's
constantly being tweaked and tuned, and the full-time programmers in a bank
build tools and infrastructure, they don't trade themselves.

~~~
profquail
Just for a bit more info...most job postings that I've seen for quant
positions generally require at least an M.S. in Finance, if not a a Ph.D. in
Finance or another technical field (Math/Physics/Comp. Sci./Engineering). This
is so you'll either already be trained in the underlying financial math, or
will be able to learn it quickly.

Also, the field is pretty stressful from what I hear. Not that some dev shops
aren't the same way though...

~~~
gaius
Yes, and you would have picked up your programming skills incidentally through
studying your main subject. Quants are not software engineers - the programs
they write are simply proxies for themselves as traders, able to react
instantly and run 24/7.

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andrewljohnson
Jeez, you'd have to be a fool to bet money on GS's software :)

