U.S. Goes to Bat for Goldman's Black Box

Eddie Braverman's picture
Rank: The Pro | 21,147

Federal prosecutors have filed an unusual request in the case against former Goldman Sachs programmer Sergey Aleynikov - they want the courtroom cleared. As in, no outside witnesses. No press, no gallery, and they've also requested that all records of the trial be sealed.

The bar for clearing a courtroom can be high, said Sandra McCallion, a lawyer specializing in trade-secret cases for the New York law firm Cohen & Gresser LLP. The government has to show that "this is something that is so secret that it will cause harm to [Goldman] if it were made public," she said.

For those who need a reminder, this is the guy accused of stealing part of Goldman's "Doomsday Machine", a black box for high-frequency trading. Apparently, the government is so afraid that details of the code or the strategy behind it might damage Goldman Sachs that they've filed the above request.

High-frequency trading is in the news a lot these days. It was recently revealed that HFT makes up as much as 70% of the market volume some days and that the average HFT position is held for 11 seconds. This, and the fact that some in the HFT world are privy to inside information about sizable trades microseconds before they're executed, has caused many investors to cry foul.

Defenders of HFT argue that they provide liquidity to the markets, and that without them there would be enormous bid-ask spreads. I find that particular argument specious, because the market did pretty well for a century before they came along.

However, I think it's naive to think that HFT isn't here to stay. Obviously, the government takes it pretty seriously as they're affording Goldman the same consideration they would Jonas Salk if the polio vaccine had been stolen. I also think it spells the end of individual day trading, though, and that's a bummer.

Here's a pretty interesting analysis on the subject by Joe Saluzzi, who cautions that the current rally in the market isn't real and that it's just "high speed guys chasing each other", and he lays out a pretty good case on the damage potential of HFT:

What say you, WSO? In favor or against HFT? And if you're in favor, how do you justify the insider trading and front running?

Comments (4)

Oct 27, 2010

He talks about how now there is a "blind system", I think that is a good thing.

HFT is on its own level.

Yours truly,
The Young Investor

Oct 27, 2010

Upload code to Pirate Bay, click send, done.

Oct 27, 2010

Don't worry, I'm sure there's going to be a book deal by the time this is done. If not, I'm sure some juror is going to wind up fabulously wealthy and Goldman will detect that another market actor is copying their strategy. :D

Oct 27, 2010