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The financial-services industry is closely watching the mysterious case of Goldman Sachs Group Inc. (NYSE: GS) and its stolen code: a proprietary computer program that some think could be used to manipulate the financial markets.
According to federal authorities, the program rapidly processes market developments and uses mathematical formulas to make lucrative automated trades.
Former Goldman employee Sergey Aleynikov allegedly stole the program during his last week of employment. According to the official complaint, Aleynikov used his computer in Goldman's New York office to upload the code to a web server in Germany. Later, he downloaded the files to his home computer, as well as to his laptop and a thumb drive.
Aleynikov was arrested on July 3 after he stepped off a flight at. He told the FBI that he "only intended to collect 'open source' files on which he had worked, but later realized that he had obtained more files than he intended." However, authorities say that after uploading the files, he encrypted them and then tried to cover up his actions.
In his court appearance on July 4, Aleynikov pleaded not guilty to charges of theft of trade secrets and transporting them abroad. He was released on Monday (July 6) on $750,000 bail.
"The bank 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," U.S. Attorney Joseph Facciponti told the judge at the July 4 hearing, Bloomberg News reported. "The copy in Germany is still out there and we at this time do not know who else has access to it and what's going to happen to that software."
In an intriguing note in the saga, Aleynikov's arrest immediately followed the disappearance of Goldman Sachs from the New York Stock Exchange (NYSE) weekly tally of program trading, which Goldman typically dominates.
Goldman spokesman Michael Duvally told Reuters that the omission was a mistake.
"According to the data Goldman Sachs submitted, we are certain we were among the top firms in terms of program trading volume for the week ending June 26," he said.
Mistake or not, the coincidence has raised eyebrows.
Goldman Sachs is not the only bank that has a program like this. Many banks try to develop mathematical formulas to automate trading and attempt to gain an edge over their competition. But, if that code gets out, others could anticipate what the firm is going to do – and use that information to their advantage.
"Once you know how someone else is going to trade, you can do a lot of things to screw them up or profit from it," Fred Lipman, a securities attorney at Blank Rome LP in Philadelphia, told Reuters. "You can figure out how to beat them at their game, so they keep it locked up and limit access to only those with a need to know."
"It is certainly possible that if you knew what the big guys were doing you could anticipate it and make money," Bruce Schneier, the chief security technology officer for British Telecommunications PLC, told The New York Times.
The question is, other than Aleynikov, who exactly has this information – and what will they do with it?
News and Related Story Links:
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- The New York Times:
Ex-Worker Said to Steal Goldman Code
- Bloomberg News:
Goldman Sachs Loses Grip on Its Doomsday Machine: Jonathan Weil
- Blank Rome LP:
Corporate Web Site.
- Newark Liberty International Airport: