Neurological Correlates

Update 07.25.09:  Finally the NYT is attempting to not be irrelevant. Weekend Opinionator: Is Wall Street Picking Our Pockets?

Update:  Thank you Sen Schumer and Zero Hedge. Sen. Schumer is seeking an SEC ban on “flash” trading which is basically front running.

NYT, better late than never. (Apologies to this new journalist who does seem to be on it, but I am feeling some schadenfreude having been mocked and ridiculed by the NYT for positing a Goldman Sachs conspiracy last fall.)

Updated: 07.18.09:  A guy who built dark pools, Warren Edward Pollack, explains why GS is frontrunning (6:28) – understandably presented for the rest of us. If you are at all interested in what’s going on with your 401K, perhaps you should know how GS jumps in front of order execution to make sure you get the worst possible deal when you buy or sell securities.  (HT: Zerohedge,  yet again, the new regulator)

Updated: 07.05.09:  On July 3, at Newark Airport, the FBI busted a former GS employee for stealing GS’s programmed trading computer program, and uploading it to a site in Germany, and, I’m guessing, draining the margins off of GS’s profits.

Puhleeze don’t plead out, Mr. Aleynikov.  (If the facts are as alleged in reports and the FBI sworn affidavit).

Backing up, ZeroHedge and Mr. Taibbi, both, have been doing what criminal investigators should do, and they don’t even have subpoena power. The basic story deals with programmed trading. GS has a client portal where clients place orders and GS’s programmed trading executes. There is some weasley contract language that looks a lot like legalese permitting GS to front-run its clients .  In other words, GS client trading portal takes client data and uses it to say to itself “Wow, I can jump in front of these client trades, and get the stock (call, put, whatever) first, and then sell it to the client for a profit in exercising their trade” . Last I checked, using client data to profit, especially front-run, is illegal under all sorts of laws, but I’m not a securities lawyer, so maybe you can waive securities laws in your contract with your client. I don’t know.   You’d think they’d have a smart NY  law firm look into that. [Again, I'm speculating based on unsupported premises -- all of this has yet to be proven]

Usually, the NYSE reports how much programmed trading there is — and who’s doing it.This information is then given over to the SEC.

The week of June 22-26, the NYSE averaged almost 50% programmed trading (almost double last year’s weekly average of about 26%). Every week, the NYSE reports the top 15 most active programmed traders, and always includes GS, natch. But, that week in June, no GS at all.  That’s weird. Why did  GS drop off the radar?

Then, this week, there was no programmed trading report at all. Dead silence. How come? As reported by ZeroHedge,

In an information memorandum released on June 24 (09-31), the NYSE Regulation team has announced the Decommissioning of the Daily Program Trading Report (DPTR).

Apparently a bunch of raw data will be submitted to the SEC, so you can’t see who’s programmed trading and who’s not.  So much for transparency.

Then, on Thursday, July 2, this notice came out:

New York Stock Exchange will remain open today, Thursday, July 2, 2009, beyond the usual 4 p.m. market close to 4:15 p.m. in order to execute customer orders impacted by system irregularities.

Never one to pass by a conspiracy theory involving GS, here’s how to connect these dots (again, total speculation on my part, none of this is proven, I’m just some cowardly anonymous blogger ):

The ex-GS employee was successful in front-running GS’s front-running program. Here’s the scenario: GS front runs clients and times order execution to close of market (when it probably bundles orders anyway).  Day in day out, this works like clockwork. But, one day, all day, someone is front running GS. So the client has two people jumping in line ahead of it, the ex-GS employee and GS. That adds, dunno, an extra femptosecond per trade. Now, GS’s perfectly timed day runs late. It’s coming up on 4 pm and whoosh, too late to execute client orders because of those extra femptoseconds added all day long by the ex-GS employee. Yikes! what to do? Stop front running the clients? Nah. It’s not that serious. Better to call the paid shills at the NYSE and ask them to keep the market open and extra 15 minutes.

If the ex-GS employee is front-running the front-running, that’s a trial worthy of the SDNY.

In a trade secret case, you have to prove the information was secret, and had value. So, did the information have value? What was the value? Was it’s major value in front running the clients? And what are GS’s damages?

Plus, now that the program is no longer secret,  why bother with a protective order of any type? You can’t unring the bell, and if the program is already out in the wild (and I don’t know that it is), then there’s no need for any kind of secrecy order. Plaintiffs lawyers? Yoo Hoo?

Like I said, if Mr. Aleynikov is criminally charged with criminal theft of trade secrets, puhleeezzeeee don’t plead out. Let’s get this out in the open. As further heroically reported by ZeroHedge (who apparently is interrupting a European vacation to blog),

. . .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 anyone who wanted to has had ample opportunity – if the holder(s) wished to sell… Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks: after all it is the very Goldman Sachs (which may or may not be the target of this program trading industrial espionage) which is the primary SLP on the world’s biggest stock exchange.

Another major question: do Goldman and the NYSE not have a fiduciary responsibility to announce to both shareholders and any interested parties if there has been a major security breach in their trading operations? Certainly this seems like a material piece of information: given that program trading accounted for 49% of all NYSE trading last week, and Goldman as recently as one week ago represented about 60% of all principal program trading, will this be called an issue threatening the National Security of the United States. Shouldn’t all market participants be aware that there is some rogue code in cyberspace that can be abused by the highest bidder, who very likely will not be interested in proving the efficient market hypothesis?  What will happened when said bidder goes about trying to front run none other than the “Financial Institution” [GS]?. . .

Ah, there’s no honor among thieves. So, might this be a case of the double “TODDI” defense — The Other Dude Did It? Or even triple TODDI among GS, Mr. Aleynikov, and a mysterious European outpost?

And what happens if there program escapes into the wild, and there’s front-running in front of front running for infinity in a Napoleon Dynamitesque “I’ve got like infinity of those” fashion?

OK. This blog may be in the blogosphere equivalent of North Dakota, but here is moral support to the journalists who aren’t beholden to Wall Street can really nail this one down. Let’s take a look at the GS (and other) programmed trading reports and see what’s there.

Stock prices having some kind of positive relationship with the value of the underlying assets.

What do we have?

Stock prices based on fictitious hypertrading programs that bid up the price like a paid shill on e bay.

Stock price have been untethered from underlying company valuations since, um, p/e’s went from an average of about “4″ to, say, “30″.

What happened?

Well, international money came in. Once that happened, in the early ’90’s,  then it had to go somewhere. Why not the stock market?

And so stock prices became inflated.

Programed trading, where soviet rocket scientists write algorithms to trade based on the zillionth of a second, then made stock prices hyperinflated. It’s like being on e bay – if you bid against a paid shill, those porcupine quills will end up at a hyperinflated cost. (Don’t worry, here’s an e bay guide to porcupine quills).

(As an aside, Auctionsniper is a handy tool to use for e bay bidding).

There are also other shenanigans, like front running, but that’s trivial compared to the programmed trading effect. (Unless the GS or other client services portals take the client data and use that to front run, then it’s the reason why GS is so “smart” — they jump ahead in line, buy up the stock, and sell it at the higher price. Story is developing. . . )

As an anonymous blogger metaphorically holed up in my scrap wood shack typing out manifestos against Wall Street, perhaps my opinion will be viewed as delusional conspiracy theory. (No, the porcupine quills are not as a voodoo fetish, they are decorative. My voodoo dolls are the lazy kind, just a pin cushion shaped like a tomato, that serves all purposes).

Here’s an interesting segment from Bloomberg via Zerohedge (yet again):