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Goldman Sachs and the Code of Gold
Plunge Protection Team [1]
Let me start by explaining the background and the purpose of the Plunge Protection Team
Oct. 19, 1987,the Dow Jones industrial average dropped 508 points, or 22.6 percent, in the biggest one-day loss in history,it was called "Black Monday". Shock waves reverberated from Wall Street all the way to Capitol Hill and phones began to ring off the wall. Discussions, cussins and repercussions reached a consensus, a plan was needed to forestall such emergencies as this.Central bankers and financial regulators came up with the idea of the Working Group. In the end the group was established by Executive Order 12631,signed on March 18, 1988 by United States P, resident Ronald Reagan. These quiet meetings of the Working Group are the financial world's equivalent of the war room. It was informally known as the "Plunge Protection Team." It is supposed to work like this......
In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.The red book is intended to make sure that no matter what the time of day, SEC officials can reach their opposite numbers at other agencies of the U.S. government, with foreign governments, at the various stock, bond and commodity futures and options exchanges, as well as executives of the many payment and settlement systems underlying the financial markets.
The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. The worry is that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up like a motor without oil.This sort of liquidity crisis could imperil even healthy financial institutions that are temporarily short of cash or tradable assets such as U.S. Treasury securities.
One of their ideas that was approved by the SEC was "circuit breakers" that would give investors timeouts to calm down.Under the SEC's rules, a drop of 350 points in the Dow would trigger the circuit breaker and bring a 30-minute halt in NYSE trading. If the Dow declined another 200 points, trading would cease for one hour. No additional circuit breakers would operate that day, but a new set would apply the next trading day.
That all sounds hunky dory doesn't it, and it should be, but I hear a knock in the engine,so lets raise the hood.
Financial writers for British newspapers The Observer and The Daily Telegraph, along with U.S. Congressman Ron Paul and writers Kevin Phillips (who claims "no personal firsthand knowledge" and is "not interested in becoming a conspiracy investigator") and John Crudele have charged that the Working Group has gone beyond their legal mandate. That the the Working Group is an orchestrated mechanism that attempts to manipulate U.S. stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures--acts which are forbidden by law. Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, speculated that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." which makes one wonder if in fact he was merely speculating or revealing what had already been happening [2]
Whats that burning smell, is that smoke? The permanent members of the Plunge Protection Team read like who's who of the financial realm and what worries me is that we already know from Matt Tabbi's article in RollingStone "The Great American Bubble Machine" that this realm is populated by Goldmen Sachs Alumni. [3]
A couple of months ago, we also learned through Zero Hedge [4] that Goldman had profited greatly from a sweetheart deal with the federal government concerning a new program instituted by the Feds known as "The Supplemental Liquidity Provider" Program ("SLP"), launched while we were all eating Turkey last Thanksgiving. It is supposed to provide "market liquidity" (i.e.: an ongoing, active market) for selected groups of 500 different NYSE stocks per SLP participant. The problem is as Durden pointed out to all who were interested, it certainly appeared to him that Goldman was the only active participant in the program.
We also learned from Bloomberg [5] that as of April, Goldman-Sachs had reaped the benefits of more $100 million-plus days of trading revenue than it had in the history of its business, wow ! How did they do that?
What many may not know is the fact that Goldman is at the heart of the government's Plunge Protection Team, a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called national security.) So you see there is the possibility that Goldman could have easily been "frontrunning" the rest of the market using their exceptionally fast proprietary computer program, or code as it is called, identifying others' market-making trades and strategies, then acting upon them for Goldman's own benefit, instead of reporting to the PPT , and executing in-house trades before the third-parties' trades were even concluded. So the Code may explain their extroidinary fortune lately. Ah, but trouble comes knocking.
July 5 (Reuters) [6]- Did someone try to steal Goldman Sachs' secret sauce?
While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.
The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades. (and maybe pre-emptive ones at that)
In a nutshell, on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. If the allegations are true, it looks like Goldman's hi-fi quant trading desk was thoroughly penetrated by a "spy", and Sergey's description of his job duties mirrors what Mr. Ed Canaday conveniently provided to Zero Hedge as a description of Goldman's SLP program. (Sources connected with the office of the United States Attorney have confirmed to Zero Hedge that Aleynikov was at one time or another a Goldman employee.").
The plot thickens: per FBI agent Michael McSwain's sworn deposition, Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Goldstein reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary.
In the 5 days immediately preceeding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder. After all, from the affidavit: "certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.
What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.
Now the real question here is, does [GS?] feel lucky? Because the code has supposedly been in the hands of an outsider for over a month, one might suspect that if the code was for sale anyone who wanted to has had ample opportunity to buy it. Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks. After all under such a scenario Goldman Sachs would lose it's advantage and Goldman Sachs is the primary SLP on the world's biggest stock exchange.
So now is the question in the air is, has Goldman Sachs lost it's secret computer program, its code? Is the curtain being pulled back to reveal the inner workings of Goldman Sachs or will this all conveniently disappear ?
sources
[1] Plunge protection team
[2] Wiki-the working group
[3] rollingstoe-great american bubble machine
[4] Zero Hedge Blog
[5] Bloomberg.com
[6] reuters-secret sauce
Let me start by explaining the background and the purpose of the Plunge Protection Team
Oct. 19, 1987,the Dow Jones industrial average dropped 508 points, or 22.6 percent, in the biggest one-day loss in history,it was called "Black Monday". Shock waves reverberated from Wall Street all the way to Capitol Hill and phones began to ring off the wall. Discussions, cussins and repercussions reached a consensus, a plan was needed to forestall such emergencies as this.Central bankers and financial regulators came up with the idea of the Working Group. In the end the group was established by Executive Order 12631,signed on March 18, 1988 by United States P, resident Ronald Reagan. These quiet meetings of the Working Group are the financial world's equivalent of the war room. It was informally known as the "Plunge Protection Team." It is supposed to work like this......
In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan. At the SEC, for example, the plan is called the "red book" because of the color of its cover. It is officially known as the Executive Directory for Market Contingencies. The major U.S. stock markets have copies of the commission's plan as well as the CFTC's.The red book is intended to make sure that no matter what the time of day, SEC officials can reach their opposite numbers at other agencies of the U.S. government, with foreign governments, at the various stock, bond and commodity futures and options exchanges, as well as executives of the many payment and settlement systems underlying the financial markets.
The Working Group's main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices -- and to prevent a panicky run on banks, brokerage firms and mutual funds. The worry is that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up like a motor without oil.This sort of liquidity crisis could imperil even healthy financial institutions that are temporarily short of cash or tradable assets such as U.S. Treasury securities.
One of their ideas that was approved by the SEC was "circuit breakers" that would give investors timeouts to calm down.Under the SEC's rules, a drop of 350 points in the Dow would trigger the circuit breaker and bring a 30-minute halt in NYSE trading. If the Dow declined another 200 points, trading would cease for one hour. No additional circuit breakers would operate that day, but a new set would apply the next trading day.
That all sounds hunky dory doesn't it, and it should be, but I hear a knock in the engine,so lets raise the hood.
Financial writers for British newspapers The Observer and The Daily Telegraph, along with U.S. Congressman Ron Paul and writers Kevin Phillips (who claims "no personal firsthand knowledge" and is "not interested in becoming a conspiracy investigator") and John Crudele have charged that the Working Group has gone beyond their legal mandate. That the the Working Group is an orchestrated mechanism that attempts to manipulate U.S. stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures--acts which are forbidden by law. Former Federal Reserve Board member Robert Heller, in the Wall Street Journal, speculated that "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." which makes one wonder if in fact he was merely speculating or revealing what had already been happening [2]
Whats that burning smell, is that smoke? The permanent members of the Plunge Protection Team read like who's who of the financial realm and what worries me is that we already know from Matt Tabbi's article in RollingStone "The Great American Bubble Machine" that this realm is populated by Goldmen Sachs Alumni. [3]
A couple of months ago, we also learned through Zero Hedge [4] that Goldman had profited greatly from a sweetheart deal with the federal government concerning a new program instituted by the Feds known as "The Supplemental Liquidity Provider" Program ("SLP"), launched while we were all eating Turkey last Thanksgiving. It is supposed to provide "market liquidity" (i.e.: an ongoing, active market) for selected groups of 500 different NYSE stocks per SLP participant. The problem is as Durden pointed out to all who were interested, it certainly appeared to him that Goldman was the only active participant in the program.
We also learned from Bloomberg [5] that as of April, Goldman-Sachs had reaped the benefits of more $100 million-plus days of trading revenue than it had in the history of its business, wow ! How did they do that?
What many may not know is the fact that Goldman is at the heart of the government's Plunge Protection Team, a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called national security.) So you see there is the possibility that Goldman could have easily been "frontrunning" the rest of the market using their exceptionally fast proprietary computer program, or code as it is called, identifying others' market-making trades and strategies, then acting upon them for Goldman's own benefit, instead of reporting to the PPT , and executing in-house trades before the third-parties' trades were even concluded. So the Code may explain their extroidinary fortune lately. Ah, but trouble comes knocking.
July 5 (Reuters) [6]- Did someone try to steal Goldman Sachs' secret sauce?
While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.
The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades. (and maybe pre-emptive ones at that)
In a nutshell, on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. If the allegations are true, it looks like Goldman's hi-fi quant trading desk was thoroughly penetrated by a "spy", and Sergey's description of his job duties mirrors what Mr. Ed Canaday conveniently provided to Zero Hedge as a description of Goldman's SLP program. (Sources connected with the office of the United States Attorney have confirmed to Zero Hedge that Aleynikov was at one time or another a Goldman employee.").
The plot thickens: per FBI agent Michael McSwain's sworn deposition, Sergey quit a firm described as "Financial Institution" in the affidavit, which according to circumstantial evidence and according to Goldstein is none other than Goldman Sachs, on June 5, at that time earning $400,000 annually. As Goldstein reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary.
In the 5 days immediately preceeding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder. After all, from the affidavit: "certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.
What is probably most notable, in less than a month since Sergey's departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases... especially those that allegedly involve Goldman Sachs.
Now the real question here is, does [GS?] feel lucky? Because the code has supposedly been in the hands of an outsider for over a month, one might suspect that if the code was for sale anyone who wanted to has had ample opportunity to buy it. Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks. After all under such a scenario Goldman Sachs would lose it's advantage and Goldman Sachs is the primary SLP on the world's biggest stock exchange.
So now is the question in the air is, has Goldman Sachs lost it's secret computer program, its code? Is the curtain being pulled back to reveal the inner workings of Goldman Sachs or will this all conveniently disappear ?
sources
[1] Plunge protection team
[2] Wiki-the working group
[3] rollingstoe-great american bubble machine
[4] Zero Hedge Blog
[5] Bloomberg.com
[6] reuters-secret sauce
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Great job. Our futures are in the hands of technocrats and fabricators of paper-shuffly finance shell games. Makes me nervous. Very nervous. And very nostalgic for the days when we simply made things - and sold them - without so much energy drain by middle-upon-middle-men producing little but ruin.
July 6, 2009 5:26 PM | Reply | Permalink
I hear ya San Fernando Curt, my dad was a carpenter who built houses and my first job was working with him. Simple,physical but rewarding work with a tangible product at the end.Kind of miss those days.
July 6, 2009 5:42 PM | Reply | Permalink
Thanks for pulling this together DonDi. Like Curt, this stuff makes me very nervous. These guys, unlike the NSA and the CIA, I find it easier to believe, are playing chess 15 moves deep into the game.
July 6, 2009 8:29 PM | Reply | Permalink
I know Miguel, lot of shadow-works. Dont be too nervous friend,the human race didn't get this far without leaving a boneyard full of Nimrods and Nixons behind. It will come out, it always has. We have new tools now to expose them, and there's more of us.
July 6, 2009 8:56 PM | Reply | Permalink
Welcome to the free market!
July 6, 2009 9:24 PM | Reply | Permalink
Qwerty, no comprende?
July 6, 2009 10:03 PM | Reply | Permalink
"In the 5 days immediately preceding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder."
Ok, cannot we just hire 20 'nerds' and put them all in prison?
July 7, 2009 1:33 AM | Reply | Permalink
dickday, where did this code come from and why is GS the only one who has it? Is there only one genius programmer on the planet? Be interesting to know more about where this code came from and who this "Beautiful Mind" mathematician is. Seems GS started outselling everyone else in such a wide margin right after they signed up for the Supplemental Liquidity Provider program with the government.
July 7, 2009 11:31 AM | Reply | Permalink
Also look at how fast the FBI jumped on this and got Sergey,they were hyper focused. If this was a government supplied code, since they have the resources to find a person or team that could write such a code,and it brought GS back from the dead and therefore in a roundabout way the economy,do we care about the legality of that? Personally at this point I can live with it, unless someone can moral me up with their point of view, if so I will be glad to listen.
July 7, 2009 12:07 PM | Reply | Permalink
In an organization which possesses ultra-high value information like this the typical procedure it to lock an employee out of any and all high value systems / data just before they are notified of dismissal or at the very moment they are getting the bad news in the bosses office.
I've been doing computers for forty years and if they didn't do the above somebody screwed up big time and for sure. I don't believe for a second they don't have security procedures in place that specify a precise process for this. Somebody's ass will be in a sling over this.
July 7, 2009 2:13 PM | Reply | Permalink
This can all be changed in a heart beat and most assuredly already has. It sounds like a whole bunch of keys to unlock a bunch of digital doors. The big deal is that they let someone take them at all.
July 7, 2009 7:59 AM | Reply | Permalink
thepeoplechoose, as I understand it,it is a math formula that when applied with data such as what is selling,how much and how fast can accurately predict an outcome. You can see how this would aide a seller to know when to buy and sell, it is legal inside information. Then if you are part of the Plunge Team and the SLP program with even more inside info then you could go from bankrupt to record sales overnight, basically what GS has done. But now their formula was nicked by Sergey and maybe distributed to others.
July 7, 2009 11:43 AM | Reply | Permalink
Its like having a card counting program at a Vegas blackjack table, you could win a lot.
July 7, 2009 11:50 AM | Reply | Permalink
Thanks for this Don, though I'm not convinced there is a big fire behind all the smoke. All the banks will have proprietary code for their automated trades, and you wouldn't want other banks to get ahold of it because they could reverse-engineer your trading strategy. I'm ready for a lot of conspiracy theories when it comes to GS, but I don't buy this one.
What does piss me off is that the DOJ is so quick on the draw when it comes to slapping down a little quant who could hurt Goldman's bottom line marginally for about a week before they change the code, whereas GS' massive multi-billion dollar fraud in securitization, etc, basically goes unchecked.
July 7, 2009 11:47 AM | Reply | Permalink
“ [Goldman Sachs] has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Mr. Facciponti, [assistant U.S. attorney], said.
And who knows "how to use this program" better than GS! Hmm?
July 7, 2009 11:54 AM | Reply | Permalink
Yes that bit caught my eye too. LOL! The USA doesn't seem to know what he is talking about, or he'd be charging GS and not the quant. Kind of sad. But check out the Bloomberg story where they lay out what GS is worried about - someone screwing them by knowing their trading strategy.
July 7, 2009 12:10 PM | Reply | Permalink
Ellen , yes thanks for that quote.
July 7, 2009 12:11 PM | Reply | Permalink
Zero Hedge blog has been following this pretty closely.
July 7, 2009 2:09 PM | Reply | Permalink
Obey, you are seeing the code as entrance keys and I am seeing it as a formula. If it is only keys then all is well since they can be changed quickly. If it is a formula, then a formula is a formula and can not be changed and get the same results.At this point I see a formula.
July 7, 2009 12:17 PM | Reply | Permalink
Sure Don, they'll have to change their trading algorithm and that's a pain in the ass. But I haven't seen evidence that there's anything particularly 'golden' about their code. Other than that GS has had some very smart people optimising the algorithms. The kind of market manipulation GS has been involved in is much more blatant - shorting products they are touting, etc. I just don't see the evidence for there being insider information involved in this automated system...
July 7, 2009 12:30 PM | Reply | Permalink
Go read Zero Hedge, they paint a different picture.
July 7, 2009 2:11 PM | Reply | Permalink
Obey let add thank you for pointing out that trading houses encrypt their info,i was thinking of this program as a predictive program but what if it is a keybreaker? Then changing the keys would not help.Now this is a juicy conspiracy theory is it not? A good conspiracy theory makes one search out the facts to debunk it and makes for good movies later even if it is bunk.
July 7, 2009 12:31 PM | Reply | Permalink
What I find so strange is how PUBLIC this story is. It should just be a story about a programmer not being very careful about taking the code he considers 'his' work with him.
It's public because someone wants it to be. who? the USA? GS? Aleinikov? very bizarre...
July 7, 2009 12:45 PM | Reply | Permalink
Obey, excellent point of thought.
July 7, 2009 12:58 PM | Reply | Permalink