As noted above, last week Goldman Sachs (GS) went after an employee who allegedly stole some of its latest and greatest program trading software and, in connection therewith, the assistant US attorney general stated in court that he had been advised by the bank that anyone with access to the software has the potential to “unfairly manipulate” the market.

Even if viewed in isolation, the mere acknowledgement by GS that its program trading software creates the “opportunity” for unfair market manipulation should raise sufficient red flags to prompt a preliminary investigation by the SEC and/or the Department of Justice.

But wait . . . there’s more (and it isn’t pretty).

As the assistant US attorney general was highlighting the potential use of the the program trading software to unfairly manipulate the markets, GS issued a public statement regarding the software in question, in an apparent attempt to reassure its shareholders.

In substance, GS offered assurances that there was no cause for concern that the ex-employee in fact would be able to use the software to unfairly manipulate the markets.

“Why?” (and here’s where the plot both thickens and sickens) . . . because, according to GS, the ex-employee does not have access to the same proprietary data base that GS maintains with respect to its clients and the markets.

So let’s understand precisely what GS has publicly acknowledged (albeit, perhaps without intending to reveal quite as much as it has):

1. GS’s program trading software provides the user with “opportunities” to unfairly manipulate the markets.

2. In order to take full advantage of these opportunities to unfairly manipulate the markets, the user also must have access to the proprietary data base that GS maintains with respect to its clients and the markets.

It is profoundly disturbing that the proprietary data base to which GS referred in the context of the potential use of their program trading software to unfairly manipulate the markets specifically included PROPRIETARY DATA REGARDING ITS CLIENTS.

At a minimum, this raises serious questions regarding the potential for “frontrunning”, i.e., that a portion or all of the massive profits generated by GS’s program trading software are the result of algorithms that enable the program to successfuly anticipate trades that will be made by others . . . including clients of GS — an endeavor made considerably easier by virtue of the access that GS has to the propriatary data base it maintains regarding its clients.

The public acknowledgments made by GS truly ’speak for themselves’ — indeed, it is difficult to see how these acknowledgements can be interpreted other than as ‘admissions against interest’.

We’ve learned the hard way just how many financial and other institutions have been allowed (if not encouraged) to become ‘too big to fail’.

By all appearances, GS has been allowed (if not encouraged) to develop a sense of ‘entitlement’ to favorable treatment by the government (the AIG bailout being just one example), which raises the question whether we’ve allowed GS to become too powerful even to be challenged and/or investigated.

One can only hope that the SEC and the Department of Justice are sufficiently alert to “connect the dots” — all of which are in the public record — and also that they are sufficiently independent and empowered to faithfully execute the duties with which they have been charged and the responsibilities which they have assumed on behalf of the American people.

Of course, such hope finds little encouragement in the tragic irony of watching the US assistant attorney general in zealous pursuit of the alleged thief, all the while missing the forest for the trees.

Just one example: rebate traders buying and (attempting or) selling at the same price provide liquidity and benefit small traders who happen to place trades at the same time.

Program trading, ditto, when they run the price they give well positioned traders a chance to get out at a better price.

The retail investor is small piece of the pie. Money changing hands is mainly between institutions.

I have been trading over forty years, some of it on the commodity floors, and I take today’s electronic trading environment over the good-old-days any time.

http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine

Have a great weekend!

Get these math nerds out of the business. Or at least severely limit their power. Themis’ idea of 1 second intervals is a great one, in my opinion.

it certainly seems like a conflict of interest. The SEC should act on this quickly. Unfortunately, it’s so complex that most politicians won’t take the time to make an issue of it because not enough constituents will express interest.

SS,

anyone who understands what these firms are doing can’t be anything but outraged.