Something really ugly popped up on Daily Kos yesterday late in the afternoon…..
…GS, through access to the system as a result of their special gov’t perks, was/is able to read the data on trades before it’s committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the
Two things come out of this:
1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen…
(2. … is way off point….)
God help Goldman if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!
God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a “handslap.” Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.
There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world……
This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can “see” traffic potentially not intended for it, could have an interface put into what is called “promiscuous mode” and SILENTLY sniff that traffic!
ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION…..
Folks, I have no way to know what the code in question does, but if there’s anything to this – anything at all – there is a major, as in biggest scam of the century – scandal here – something much, much bigger than Madoff or Stanford.
What would this mean, if it was all to prove up?
It would mean that Goldman was able to “see” transaction order flow – bid, offer, and execute messages – before they were committed in the transaction stream. Such a “SNIFF” would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.
The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively “stealing pennies” from each transaction they were able to front-run.
Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had “special network access.” Nothing. All I have to go on with regards to “market manipulation” (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.
This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos. But consider the following:
The last few days the the market has traded “organically.” I and many other market participants have noted that prior to the week before July 4th the market had been acting “very odd” – normal correlations between interest rate, foreign exchange the the stock markets had been on “tilt” for the previous couple of months, with the amount of “tiltage” increasing dramatically in the last three or four weeks. In fact, many of my usual indicators that I use for daytrading had become completely useless. Suddenly, just before the July 4the weekend, everything started correlating normally again. I have no explanation for this “light-switch” change but it aligned almost exactly with the day the NYSE had “computer problems” and extended trading by 15 minutes. Was there a configuration change made to their networking infrastructure, one asks?
Zerohedge‘s information, if you believe it, seems to point toward some sort of distortion. The cite above claims statistically “as likely as an asteroid hitting earth it is not true” proof of distortion in the market. I have not analyzed the data to independently validate that conclusion, but even if the odds of these “effects” in the market being random chance are only as good as getting hit by a tornado this afternoon……
Every market participant deserves answers on this point. Specifically to the NYSE and all other markets where colocation connections are made and allowed:
- Was it possible for message traffic to be “seen” by computers on your network and colocated into your infrastructure by other than the originator and recipient? That is, was it physically possible for anyone to “sniff” messages to and from other market participants.
- If it was possible, is it no longer possible, and if so, when was that change made?
I believe the SEC and FBI must direct a subpoena at all market exchanges for an under-oath answer to question #1. If the answer to that question is “yes” then every market participant who had or has equipment colocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed “sniffing” traffic and front-running orders.
The charge made on the pages of Daily Kos is incredibly serious. If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.
Market participants deserve an answer to these questions.
Wednesday, July 8. 2009
Posted by Karl Denninger in Regulatory at 15:03
Source: The Market Ticker