Notes Antic Disposition

Flocks of Black Swans

Many programmers and those with ears tuned in to murmurs from the dark side of the finance industry will have heard the recent story involving Goldman Sachs.

The emerging situation seems to be that Sergey Aleynikov, a programmer leaving Goldman Sachs, compromised the code of the company’s top-secret (and highly profitable) automated trading program but a case of quant trading sabotage is hardly enough to bring down this giant investment bank, is it?

The most mysterious aspect of this whole story is the true nature of the market activity that has taken place since the code was compromised. Was the code in the hands of outsiders for weeks before the breach was detected? Did Goldman Sachs know that the code was loose, and did they feed the situation by waiting for a prime moment to arrest Aleynikov? Has this deep knowledge of how Goldman Sachs automates market manipulations been deployed in any way?

One of the key pieces of information that led to this story breaking was the emergence of a huge decline in the automated trading activity of Goldman Sachs. In June, the NYSE reported Goldman trades on its own account making up 60% of program trading. A week later, Goldman disappeared from the list of program traders entirely.

While Google is probably experiencing an upwards trend in searches for “goldman sachs code torrent erlang”, the situation is made more confusing by recent changes to the way that NYSE trading is reported and the bizarre story of the supposed ‘bug’ in the NYSE trading data for the week in question where Goldman disappeared from the list.

I’m still not quite sure what to make of the Zero Hedge blog, which has been the leading source on this story. What is most sinister is the overall position that Goldman Sachs holds in the American economy.

With real-time automated algorithmic trading taking up a huge amount of the volume of buying and selling of stocks, securities, commodities, whatever can be bought and sold, it’s not hard to imagine actual market patterns of trade and exchange becoming increasingly byzantine and impenetrable. There is nothing in any traditional form of economics useful enough to explain these complex patterns. Goldman Sachs are well placed to make obscene profits from this dissonance if they can weather the (not insignificant) ethical scandals of the moment.

Matt Taibbi’s recent feature for Rolling Stone — The Great American Bubble Machine — provides a plain and riveting explanation of just how Goldman Sachs have risen to this position. Just who do you think was the leading private donor to Barack Obama’s presidential campaign? Someone needs to create a They Rule styled visualization of key government positions occupied by former Goldman Sachs employees.