While the rest of the country strips Sarah Palin of her humanity for no good reason except that mobbing is so much fun, something very weird is going on with Goldman-Sachs. There are a number of credible sources reporting now on the arrest of Sergey Alenyikov on July 4, 2009 at Newark Airport. Mr. Alenyikov is accused of stealing G-S source code and uploading it to a computer somewhere in Europe. Goldman sent the Feds to round up the rogue programmer because, as the US Attorney on the case says, the source can be used to manipulate the market. Daytraders who monitor the market very closely say that they noticed some non-linear activity in the several weeks leading up to the arrest and that afterwards, the markets seemed to have returned to normal, whatever that means since last year’s crash.
But it gets more interesting. As Bloomberg notes, how do we know that Goldman-Sachs hasn’t been using this code all along to manipulate the markets? The theory goes something like this: Goldman-Sachs gets to put a unix server with the code on a network cable somewhere and uses a packet sniffer to watch the transactions that come across from traders at other companies. With that knowledge, G-S is able to anticipate trades and shave a bit off for itself for every transaction. If this is true, it means that G-S has a massively unfair advangtage in trading compared to, well, just about everyone else. Here’s a post at the Big Orange Cheeto for those of you who eat netstats for breakfast and think Perl poetry is romantic. It goes into quite a bit of technical detail.
Check out this video from Bloomberg that lays it all out:
What’s really disturbing about this case is that the government seems to be extraordinarily receptive to calls for help from G-S. Either the Goldman crew close to the White House is concerned with losing their bonuses or the potential for market failure is huge. Either way, it lessens confidence in the system. It looks like “all traders are equal except some traders are more equal than others”. What happens to the system when the people who have no choice but to operate in it no longer have any trust? This leads me to my podcast du jour recommendation. This one is from Speaking of Faith with Krista Tippet. Her topic this past week was The Science of Trust with guest Chris Farrell, a neuroeconomist. The secret to keeping everyone honest is the neurotrsnsmitter hormone oxytocin. Oxytocin promotes empathy. Approxomately 2% of the population has insufficient levels of oxytocin to experience empathy with other human beings(and you’re probably thinking they all work at Goldman-Sachs, right?)
Farrell says that the lax regulatory system is partially responsible for the financial disaster, although he takes a pretty long time before he gets around to saying it. Farrell thinks that for *most* people, *most* of the time, the feelings of empathy lead to a sense of reponsibility and honesty. That’s why you might have felt you could trust your banker with your money. But in recent years, there have been advances in technology that lead to a depersonalization of the banker-client relationship. It’s hard to see the person behind an account number on a monitor.
The podcast is part of a series by Tippett on Repossessing Virtue, all highly recommended. You don’t have to be religious to have an ethical model. But ethics, virtue and trust are all severely lacking in this dog eat dog world where nothing much makes sense. Societies start to unravel when the sense of morality and consideration for others is replaced by, well, nothing at all.
If Tippett is concerned with repossessing virtue, I guess you could say that the fundamentalist group, The Family, is concerned with redefining it. A second podcast recommendation is one that Terry Gross did last week on The Family, a religious community in DC that has been the spiritual guiding force for many enemies of The New Deal over the decades. John Ensign was a recent alumni as was Governor Sanford of South Carolina. The Family believes the end justifies the means and that chosen Family members are possessed of the virtue that requires no further regulation by the government. They will lead us because it is their destiny and if they cheat on their wives on Family property, it must mean that God works in mysterious ways. Caveat: Terry Gross is the best interviewer in the world but she has kool-ade psychosis and it is unfortunately seeping into her interviews. “The propaganda is strong in this one.” Proceed with caution. Her bias shows. Even so, if this group is only 1/10th as bad as the interview suggests, it’s pretty bad.
Update: It looks like Citadel is getting in on the act now. The former head quant at Citadel started a new company called Teza Technologies and hired Aleynikov. Mikail Malyshev signed a 9 month noncompete clause when he left Citadel back in February. That means he wasn’t supposed to open his door until November. Maybe it’s all a preparation phase thing. Teza is cooperating with the FBI. This stuff is starting to sound familiar. Several of my former colleagues (all Russians BTW, tho’ I’m sure it’s all a coincidence) have gone to work for quant firms, though I can’t imagine they’ll be writing code. Who knows?