Still out in the boonies, so a few more days without extended analysis. In the meantime, some more amusement on GoldmanGate: Cryptogon has created a piece of html code that Google queries latch on to when searching for "Goldman Sachs Code Torrent", allowing the sysadmin to track which IPs and firms are querrying this keyword. Interesting results. From the website:
I have not seen as much activity from Goldman Sachs as I thought I would on my little honey pot. This is all so far. Then again, this hasn’t even been up 24 hours yet:
Other interesting visits: Citadel Investment Group 64.22.160.1 2009-07-07 11:53:59 /?p=9712 Referrer: Direct hit Hostname: cit1.citadelgroup.com
InfoNgen is the first Discovery Engine for business, finance and information professionals that knows what’s critical to you. Extracts relevant and timely information buried on the web, within emails, in desktop documents or on network drives. Identifies trends and connections between topics, companies or products that might not otherwise be apparent. And delivers results in real time.
63.87.234.186 2009-07-07 05:12:58 /?p=9712 Referrer: Direct hit Hostname: host186.infongen.com — Batterymarch is a global equity specialist, investing in approximately 50 countries for clients around the world. Our unique quantitative strategies combine the power of technology with the wisdom of experienced fundamental investors.
128.190.125.2 2009-07-07 17:59:55 /?p=9712 Referrer: Direct hit Hostname: wks125-2.belvoir.army.mil — Clough Capital
74.201.46.1 2009-07-07 17:38:18 /?p=9712 Referrer: Direct hit Hostname: host1.cloughcapital.com — Microsoft
131.107.0.101 2009-07-07 17:09:44 /?p=9712 Referrer: From your blog Hostname: tide531.microsoft.com — The Benefit Company
66.184.209.18 2009-07-07 16:20:15 /?p=9712 Referrer: Direct hit Hostname: 66.184.209.18 — At ECBridge™, we know that information is the lifeblood of today’s business. Our experienced, international team helps clients plan, implement and manage innovative e-business solutions. We can help your firm gain competitive advantage, by extending the reach of your company’s information.
207.111.251.165 2009-07-07 16:12:14 /?p=9712 Referrer: Direct hit Hostname: mail.ecbridge.com — New York City Police Department
206.212.185.216 2009-07-07 12:49:12 /?p=9712 Referrer: From your blog Hostname: 206.212.185.216 — City of Houston
204.235.227.149 2009-07-07 12:05:43 /?p=9712Referrer: From your blog Hostname: 204.235.227.149 — Note: U.S. Department of Homeland
Security is obsessed with this post, and with Cryptogon, today. There are at least a couple of DHS employees who read Cryptogon as a matter of routine, but the activity over the last 24 hours shows 10 visits, 43 page views from five different hosts/IPs:
Must read. An interesting section from Facciponte:
My understanding is that Goldman Sachs realized that this was a problem based upon their review of those logs just a few days ago. The government was not contacted until Wednesday about this matter.
I think what Ms. Shroff is confusing is Goldman’s civil remedies, to the extent that it has any, and this criminal case. Maybe Goldman can go out and get whatever the German equivalent is of a TRO. But this is, in the government’s view, a crime that we have shown probable cause for, and therefore it is possible that the defendant may compound his crime and pose a danger to the community. And the bail statute allows the court to detain him if he is a danger.
Shoff takes offense to this and makes the point that Goldman likely knew about the situation for over a month, delaying, for unknown reason, until striking when it did. Some derivative conspiracy theories could be derived from this. But in a nutshell, the math, according to the sworn testimony by the U.S. Attorney, is that it took less than 48 hours between Goldman realizing it had been compromised (on Wednesday) and the FBI arresting Sergey at Newark (on Friday).
And here is what seems to be the challenge for all hackers out there:
THE COURT: Well, what makes you think that it hasn’t already been transferred since you do now know whether other people have access to the Germany server? It’s already compromised, so the financial institution has to take steps now if you’ve made it aware of the compromise to adjust for the loss of its trading platform.
MR. FACCIPONTE: Your Honor is correct. I could’ve been disseminated in this time. It does not mean, however, that if it has not been disseminated we should not take steps to prevent the defendant from disseminating information if it is not already out there. ...
THE COURT: If as you say, the material is on the server in Germany, if anyone can access the material through that server, that is to say it is not only the defendant who can access it; he might be able to provide other persons with information that would allow them to access it, if that’s so, then what difference does it make whether he’s detained or not if he can communicate that information?
MR. FACCIPONTE: Right now our understanding is that the server can only be accessed by someone who has his user name and password.
THE COURT: Who has what, sir?
MR. FACCIPONTE: His user name and password.
THE COURT: Okay. So if he gives that to you, you can access that, isn’t that correct?
MR. FACCIPONTE: That is correct, Your Honor.
THE COURT: So whether he’s detained or not doesn’t him from communicating that information to you or anyone else. And therefore the server could be accessed and the financial institutions and the markets compromised as you have described.
MR. FACCIPONTE: It would certainly be more difficult, Your Honor. And I don’t believe the public ought to bear the burden or the risk of that coming to past. In addition --
THE COURT: But if he’s detained, what prevents him from communicating the information? That’s what I don’t understand.
MR. FACCIPONTE: It would be a lot harder. He would have to at the very least enlist and accomplice.
THE COURT: Okay.
MR. FACCIPONTE: Which people may not want to be accomplices. [TD: not so sure about that one]
THE COURT: That’s true whether he’s detained or at liberty.
MR. FACCIPONTE: Okay. But if he’s at liberty he would not necessarily -- he would not need an accomplice. He could just pass it on to another server somewhere.
THE COURT: He may already have accomplices who may have the information that can access the server in Germany. Whether he’s detained or not, I still don’t understand why being detained means the information can’t be disseminated to access the server.
MR. FACCIPONTE: Because the server -- if the server had been in the United States, Your Honor, we would already be preparing process to free --
THE COURT: But it’s not.
MR. FACCIPONTE: The government needs a few days, given the holiday weekend, it would be difficult to do that. But the government needs a few days to consult with German authorities to take the steps to freeze that server.
So if the court is not prepared to detain the defendant on a general showing, the government would at least ask that the defendant be detained until such time as they can secure the server, which we are moving to do even as we speak now.
THE COURT: I still don’t understand why detaining him prevents him from communicating information so that someone can access the server. If you make that clear to me, then I understand more acutely why you’re arguing that he should be detained.
MR. FACCIPONTE: Well, he would --
THE COURT: If it just makes it difficult, lots of things are difficult, but not impossible.
MR. FACCIPONTE: If he were detained now, for example, I don’t believe he would have immediate access to telephone privileges at the NCC or MDC. I believe it takes days to set those accounts up. He would have to tell somebody physically. I don’t believe anybody would -- he would have to enlist a co-conspirator right now.
And I think when you weigh the probability of him engaging in that behavior and being able to pull that together, first is the potential risk of just letting him go, I believe he ought to be detained. Because he still has more burdens in prison to disseminate his information than he does if he’s out in the street.
So if he’s out in the street, he just needs access to a cell phone. In prison, he needs to get access to a phone which is not a right if he is detained. He would need to write a letter. A letter takes several days to get to where it needs to go.
In the meantime, we would have -- we would very likely have the server locked down at that point in time.
So in a nutshell, here is Goldman's manifesto: Yesterday - Program Trading, Today - Germany, Tomorrow - The World.
GATA today urged the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission to investigate the Goldman Sachs Group Inc. computer trading program that, according to a federal prosecutor, the bank acknowledges can be used to manipulate markets.
GATA's complaint referred to the Bloomberg News story dispatched to you yesterday --
-- reporting the arraignment in U.S. District Court in New York of a former Goldman Sachs employee accused of stealing the program. The prosecutor, Assistant U.S. Attorney Joseph Facciponti, was quoted as telling the court: "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."
In letters to the SEC and CFTC, GATA wrote: "The assistant U.S. attorney's comment can be construed to suggest Goldman Sachs considers its own manipulation of markets to be fair, while such manipulation by others would be unfair. The court proceeding described in the Bloomberg News story would seem to impugn all markets in which Goldman Sachs trades."
GATA asked each commission "to investigate Goldman Sachs' trading program urgently and report its findings publicly."
The text of GATA's letters is appended.
CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc.
* * *
GOLD ANTI-TRUST ACTION COMMITTEE INC. 7 Villa Louisa Road, Manchester, Connecticut 06043-7541
July 7, 2009
Gary Gensler, Chairman U.S. Commodity Futures Trading Commission 3 Lafayette Centre 1155 21st St., N.W. Washington, D.C. 20581
Mary L. Schapiro, Chairman U.S. Securities and Exchange Commission 100 F St. N.E. Washington, D.C. 20549
Dear Chairman Gensler / Dear Chairman Schapiro:
I'm enclosing a copy of a report distributed July 6 by Bloomberg News Service about the U.S. government's prosecution of a former employee of Goldman Sachs Group Inc. involving the purported theft of a Goldman Sachs computer trading program. The report quotes Assistant U.S. Attorney Joseph Faccipointi as saying in U.S. District Court in New York City: "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."
If the report quotes the assistant U.S. attorney correctly, and if he was characterizing Goldman Sachs' position correctly, then Goldman Sachs claims to have possession of a computer trading program that can manipulate markets. The assistant U.S. attorney's comment can be construed to suggest Goldman Sachs considers its own manipulation of markets to be fair, while such manipulation by others would be unfair.
The court proceeding described in the Bloomberg News story would seem to impugn all markets in which Goldman Sachs trades. On behalf of the Gold Anti-Trust Action Committee Inc., I ask your commission to investigate Goldman Sachs' trading program urgently and report its findings publicly.
Some perspectives on why everyone should take out their credit cards (preferably one issued by General Electric), dial 1-900-PIMCO and buy as many treasuries as their credit rating will allow them. Also, fast forward to 4:20 for some candid observations on puppeteering regarding PIMCO's most recent personnel addition. Odd that CNBC should be asking such questions. Sphere: Related Content
The NYSE has officially released the correction for its lapse in reporting Goldman Sachs' program trading numbers last week.
NEW YORK , July 7, 2009 --The New York Stock Exchange today issued a correction of the program-trading-data press release issued on Thursday, July 2, 2009. Due to an NYSE system error, Goldman, Sachs & Co. was inadvertently omitted from the chart of most active firms, but the firm’s program activity was included in the total level of programs as a percentage of NYSE volume, which remains unchanged at 48.6 percent. Certain of the other data are revised on the press release below, and on the attached chart, incorporating the omitted data as well as subsequent minor corrections relating to other firms.
The data indicated that during June 22-26, program trading amounted to 48.6 percent of NYSE average daily volume of 3,449.8 million shares1, or 1,675.7 million program shares traded per day (Revised from 1,678.3 million program shares traded per day).
Program trading encompasses a wide range of portfolio-trading strategies involving the purchase or sale of a basket of at least 15 stocks.
In all markets, program trading by member firms averaged 4,896.3 million shares a day during June 22-26 (Revised from 4,898.9 million shares a day). About 34.2 percent of program trading took place on the NYSE (Revised from 34.3 percent of program trading), 0.3 percent in non-U.S. markets and 65.5 percent in other domestic markets, including Nasdaq, NYSE Amex and regional markets.
1 The NYSE calculates program trading as the sum of shares bought, sold and sold short in program trades. The total of these shares is divided by the sum of shares bought, sold and sold short on the NYSE including its crossing sessions.
Here is the corrected PT report for the Russell rebalance week. How a "system error" can lead to the drop of the firm that traded nearly 3 billion shares, yet have the Goldman numbers actually flow thru for aggregation purposes, is an open question.
Zero Hedge appreciates the NYSE's efforts in bringing transparency to the high-frequency trading markets and in fixing flawed information. Granted, one would be tempted to inquire just what other reported data the specified "system error" may have rendered completely useless, and whether this "system error" was also pertinent in the unprecedented extension of last Thursday's trading session. However, Zero Hedge knows not to push its luck: however, we can hope that in due course, all relevant information will eventually surface.
Sphere: Related Content
The logical follow up to Rosie's earlier CNBC appearance is the teaser from his "Snack With Dave" email sent out to Gluskin Sheff clients. For the full body, we suggest readers apply for a free subscription to all of Rosie's musings.
We heard at the market lows in March 2009 that the stock market had sunk to Armageddon levels. We have often thought about that because we can certainly understand that at the 2.0% lows on the 10-year Treasury note yield, we had gone to a place we had not seen in over five decades. Also, with Baa spreads north of 600bps, we could see that corporate bonds had moved to levels not seen in seven decades as well.
But this notion that we had moved to Armageddon lows in equities does not seem to hold water. After all, the forward P/E multiple on the S&P 500 at the lows was 11.7x. That was not a multi-decade low or some massive standard-deviation figure — we were actually lower than that at the October 1990 lows when the multiple was 10.5x and frankly, coming off the 1987 collapse, the forward P/E had compressed to 9.8x. As it now stands, the multiple is back very close to where it was at the October 2007 market high, when the multiple had expanded to 15.0x. The range on the forward P/E over the last quarter-century is between 9.8x and 21.8x (excluding the tech bubble), so at 14.5x currently, it is hardly the case that this market can be viewed as a bargain.
On a trailing earnings basis, the P/E multiple has actually widened, from 17.0x at the lows to 23.3x currently, a huge multiple expansion. At this stage of the 2003 recovery, the multiple hardly expanded at all, earnings were driving the rebound; coming off the October 1990 lows, the multiple expansion four months into the rally was closer to 2x and the powerful surge in the post-1982 recovery saw a 3x multiple point expansion at this juncture — not 6x!
As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.
Also, Matt Taibbi is slowly emerging from the post article vacuum: his first written interview since the GS piece, compliments of Wall St. Cheat Sheet. Some excerpts:
Damien: The last word I wrote after I finished reading “The Great American Bubble Machine” was ‘Leviathan’. Since you’ve done some great research covering Wall Street and Washington, do you know of policy tools we can use to dismember what you affectionately called the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”?
Matt: I interviewed a government regulator for my previous piece [“The Big Takeover”] who said state regulators already have enormous power. The state banking commissions or insurance agencies, SEC, or the Office of Thrift Supervision can simply write a letter to these banks and say, “You won’t exist tomorrow unless you …” or, “You’re not going to get government funding unless you do this.”
So, they already have enough power to correct all the problems people are worried about. The problem is getting the appropriate people to staff those bureaucracies. If enough people put pressure on members of Congress and the President to appoint the appropriate people, then we should solve most of these issues. I’m not sure what new policy initiatives would be needed. I just think we need new people.
Damien: Do you believe the citizenry can put enough pressure on our legislators, or are we the sheeple who are too confused, ignorant, or entertained to affect change?
Matt: The real problem is people aren’t organized enough to make it worth the while of politicians to pay attention to ordinary people. The disadvantage the average Joe has against Goldman Sachs is Goldman can concentrate its campaign contributions in its favor. The typical politician is not going to upset or alienate the five most powerful investment banks because he knows realistically he will jeopardize 30% or 35% of his next election cycle’s contributions. On the other side, there isn’t a way for the average person to organize and deny these politicians the money they need to get reelected. So, until we solve the campaign contribution problem, we won’t have the legislative tool to rebalance the power.
Damien: So are we living in a Catch-22 where we have to choose between the Goldman Leviathan sucking the world’s wealth from loopholes or the omniscient eye at the top of the governmental pyramid which becomes the one crown reigning over us all?
Matt: It’s pick your poison. But before we can even worry about the international government question, we have to start at home with our own country. We have to start by protecting the citizens of our country. Even in the United States, Goldman is allowed to get away with things they shouldn’t be allowed to get away with. If we can tighten up and enforce the rules here, we will be much better off before even looking at the international issue.
Damien: Most powerful institutions such as the Federal Reserve and Vatican dismiss most criticisms as “fringe conspiracy theory.” Why should the average citizen not dismiss your claims against Goldman as fringe conspiracies about bankers or Jews?
Matt: That was the tactical criticism I got from Goldman who said to the media, “Next thing you know he’s going to blame us for the Kennedy assassination and say we faked the moon landing.” But if you pay attention to all the criticisms they are leveling, it’s what we call in this business a “non-denial denial.” When people respond by calling names and changing the subject, it means they don’t have any issue with the factual allegations in the article. So, in response to being called a conspiracy theorist, the fact is they are resorting to the rhetorical non-denial denial shows they don’t have any real basis to criticize the facts in the article. The article speaks for itself and the fact they don’t have substantive issues with the piece is highly revealing. In fact, before the article went to print I was extremely nervous we had gotten something wrong and Goldman would come out with a whole list of things they’d say we made mistakes about. But the fact that they didn’t come up with a single thing greatly emboldens me to think we got it right.
We have talked extensively on our blog and in our white papers about the power of high frequency trading and program trading. We have noted that these trading strategies can move the market quickly during the trading day. We have always suspected that there have been certain major players that can dominate this space. Now comes the case of the stolen proprietary trading code from Goldman Sachs.
Most interesting in this Bloomberg article is the following statement by Assisitant U.S, Attorney Joseph Facciponti:
“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,” Facciponti said.
Is this an admission by Goldman Sachs that there is the possibility of manipulation in the market? Does anyone think that this is the only program in the world that can “manipulate” markets? With all the programmers in the world, we can only imagine how many more manipulative programs are out there. Now here is the best part according to the assistant U.S. Attorney:
The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.
Markets are a zero sum game - somebody wins and somebody loses. Where do you think these “many millions of dollars” are coming from? They are coming from you - the average retail investor and the large institutional investor. These programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the pockets of the retail investor and the traditional money manager. [TD: highlight mine]
So, who is out there to protect you from these “machines” and their army of programmers? One would think the SEC has your back. But what did they have to say about high frequency trading. According to an article in the WSJ (http://online.wsj.com/article/BT-CO-20090618-707189.html )
The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to trade against the machines without further regulation.
“We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the managers themselves to make sure other traders aren’t manipulating their models.
This story is just at the beginning stages and we here at Themis Trading intend to keep a careful watch on it.
Sphere: Related Content
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US Service economy contracts at slowest pace in nine months in ISM index.
US should consider a second stimulus package, Obama adviser Tyson says.
Adidas AG plans to raise 500M Euros in debut bond issue in currency.
AT&T, Verizon under focus after Justice Dept initiates antitrust review.
Bank of America and Harley-Davidson to lead $9.5B of TALF bond sales.
BASF to cut 3700 jobs - part of the integration with Ciba; may sell or close 23 sites.
Basic Energy to sell $225M in notes to repay credit line.
Beijing Automotive (BAIC) faces long odds in its bid to buy Opel
Covanta Hldg Corp to buy enrgy and waste assets from Veolia for $450M cash.
CRH intensifies cost-cutting program after profits fall 83% on building slump
CVS Caremark renews contract with Cardinal Health, McKesson; deal seen as less favourable economically to suppliers, but better than expected.
Discover Fincl Srvcs to sell $500M of stock, may repay Treasury bailout funds.
EMC raised its takeover bid for Data Domain to $2.2B.
Fiat and China's GAG have agreed to form a 50-50 joint venture.
Ford will face increased pressure from a lean GM.
GM is close to exiting bankruptcy.
Lear Corp. plans to restructure ~$2.3B debt, create a new 9-member board.
Regis Corp. plans to offer 11.5M shares, $125M in 5-year convertible senior notes.
Societe Generale: Likely post a small profit in Q2, despite reduced revenue.
Toyota plans to spend $500M on US SUV plant revamp as sales drop.
Earnings Calendar: BMJ, GBX, ISCA, KED, RT, SHLM.
Companies to watch: A. Schulman, BASF, CVS Caremark, Discover Financial Srvcs, EMC, Ruby Tuesday, Toyota, The Greenbrier Cos.
Recent Egan-Jones Rating Actions: EDISON INTERNATIONAL (EIX)ALLIANT ENERGY CORP (LNT)ALASKA AIR GROUP INC (ALK)SPRINT NEXTEL CORP (S)DENBURY RESOURCES INC (DNR)SMITHFIELD FOODS INC (SFD)BEMIS CO INC (BMS)GENERAL MILLS INC (GIS)CONSTELLATION BRANDS INC (STZ)BEAZER HOMES USA INC (BZH)LEAR CORP (LEA)BALL CORP (BLL)GANNETT CO INC (GCI) Data provided by: Egan-Jones Ratings and Analytics .
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Just when one thought it is possible to have a big scandal erupt, in which Chicago is named and not have Ken Griffin involved, the Citadel trail emerges. Contrary to previous rumors that Getco may have been the unfortunate firm to land Bond, Serge Bond, Misha Malyshev's new outfit, Teza Technologies, emerges with a bang. Teza, run by Misha, whom Zero Hedge has discussed previously, former Head of High-Frequency Trading at Citadel, together with another former teammate and recent Princeton grad (resume recently pulled from the interwebs), Jace Kohlmeier, announced that it had suspended Sergey without pay after learning of the allegations. From Bloomberg:
Aleynikov, 39, started at Teza on July 2, the day before he was arrested, the firm said in an e-mailed statement today. Teza, co-founded by Misha Malyshev, a former trader at hedge fund Citadel Investment Group LLC, said it first learned of the allegations on July 5 and suspended Aleynikov without pay following an investigation. The firm “was not aware of the alleged misconduct” and offered to cooperate with the government, according to the statement. James Margolin, a spokesman for the FBI’s New York Office, said the investigation is continuing.
One wonders if the arrest of Sergey one day after his formal start at Teza was strangely coincident. It is easy to imagine that 85 Broad would like as little hi-fi competition in any way, shape or form, and Misha, whose group at Citadel was the only profitable one last year, would have likely presented just such a "challenge." Arguably Goldman was just waiting for the Teza confirmation before throwing a 10,000 page injunction against Teza to prevent the current group from ever trading 1 share of high-frequency traded SPY in their combined lifetimes, based on possible information that Sergey may have "leaked" to Misha and Jace. And another one bites the dust.
Sphere: Related Content
“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,” Facciponti said. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”
The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.”
The proprietary code lets the firm do “sophisticated, high-speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.
Not even going to attempt to elucidate in how many different ways the first sentence above is just...plain wrong. At least it is refreshing that none other than Goldman's own de facto attorney admits that the firm has created a piece of code that permits "market manipulation." When Goldman is the perpetrator, the manipulation is conveyed via "fair ways." And when the manipulator is someone else, the ways become "unfair."
Of course, Goldman will be happy to know that according to PACER, Aleynikov has just posted bail and is freely roaming the grounds of SDNY, EDNY and District of New Jersey, however the "PTS Office shall be permitted, to the extent possible, to monitor the deft's use of computer's or other electronic devices at his home or place of business to ensure that the deft does not access the data that is the subject of this criminal action." Something tells me monitoring Sergio's (former) place of business will yield a lot more clues in the prosecution's gathering of data for criminal action.
Maybe I am too drunk but... what the hell is going on here? When will Kevin Mitnick appear stage left and hold the world ransom for one hundred million dollars after announcing he has hijacked every SPY ETF ever put in circulation.
P.S. Any reference of the "Serge" individual referenced above to the now (in)famous Sergey Aleynikov is, of course, purely intentional.
And now for some evening real estate porn combined with a slow motion career trainwreck. Not that it matters to the Serge(y) Aleynikov estate all that much anymore, but some preliminary digging by NJREReporthas uncovered pretty much most loose ends in the case of the Russian 007 that was never meant to be. First: here is the tax property detail to the 38 year old's house. Not that exciting. What is more amusing is the dramatic price decline as Serge(y) was trying to offload his 4 bedroom colonial, which was first put on the market in August 2008 (oddly, the Chicago firm, which everyone has identified by now, still has not indicated just when it was that it first approach Serge... and under what guise did it agree to raise his base pay to $1.2 million). Either way, Serge(y) tried to sell first for $689,000, and after less than a year is now "PRICE TO SELL AND PRICE BELOW NEW ASSESSED VALUE" at $550,000: at least the man has a good sense of the true NJ real estate market: those math Ph.D. and SS7 certifications come in handy on occasion. (Alas that price does not cover the $750,000 bail set earlier for Mr. Aleynikov, maybe they can throw in the Honda as part of the package).
Any interested buyers who want to "move right in" should contact Julie Corbo at RE/MAX: if Serge(y)'s MO is any indication, the first to dig a hole in the back yard may just uncover all the program trading secrets that have ever existed.
Other circumstantial evidence: projection ping pong table with Dolby 7.1 surround sound, washed out beige leather sofa and futon, satin sheets, and a corner jacuzzi. After further review, it is no wonder that Serge(y) was willing to sell to the highest bidder.
The intra-day story has been the US equity market bouncing on the increasing strength of credit markets while the commodities market continues to decline on fears of slower economic growth than what is currently priced in. The near month contract for light/sweet closed down 4% to the lowest level in over a month at $64/barrel while the equity market has gained back against the losses from earlier in the day.
Of course this could mean everything... or it could mean nothing. It is easy to chalk up the price action in crude to a rationalization back to supply/demand reality but it is also important to think about the implied expectations for unemployment and the USD (especially in light of last week's news releases). As always, the reality is somewhere in the middle but we have to think there is some truth to be uncovered here (especially with the sluggishness of the equity market's reactions to news releases). This week (and possibly the next) will determine who's telling the truth but for now we stick to dollar strength until we get more insight into what's going on.
Zero Hedge is still trying to ascertain whether this Sergey Aleynikov is "that" Sergey Aleynikov, but if 1=2, then (to keep it algo) it would seem Goldman's HR department is rather lousy at doing background checks. (Also, was Sergey in pro per? Hopefully he has learned how to retain counsel by now.)
The story of Goldman's missing PT data has now entered the twilight zone. Matt Goldstein at Reuters reports that Goldman spokesman Michael Duvally notified him that Goldman did in fact not only perform its usual NYSE SLP domination, but also reported of this, as it does every week:
“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.”
And guess who is taking the blame: our old friend Ray Pellecchia over at the NYSE:
“Due to an error on our part, the program trading report needs to be revised and we will have a revised list out later this week. It was a system error on our part.”
Ray... just what system does the NYSE use that mysteriously drops the top Program Trading participant: is there a [if shares traded > 1 billion; AND; NYSE vows to Zero Hedge infinite transparency, do "Report 0"] line somewhere in that particular system? Our debugging skills are a little rusty but we would be happy to go through the code line by line and find all other comparable possible systemic errors. In fact, we would make it a crowdsourced event and allow all our readers to participate in that endeavor. Imagine just how bug free the NYSE system would be as a result of this voluntary venture. Of course, this would also prevent such dramas as 15 extra minutes of trading tacked on during the lowest volume day of the year, due to the NYSE's inability to clear and process this abnormally low trade volume.
Of course, Zero Hedge will gladly report the "adjusted" weekly PT data to the millions of people who have all of a sudden found a great interest in the NYSE's PT reporting. Furthermore, all those millions have somehow found their way to our new website, which unfortunately is still in the process of transferring over to its new much faster servers, and as a result of the unexpected explosion in traffic, has been either down or painfully slow all day. We appreciate readers' patience as we address this unprecedented traffic spike.
Sphere: Related Content
Now that Goldman and the NYSE's Supplemental Liquidity Provider program have finally attracted a critical mass of necessary (and hopefully sufficient) public attention, Zero Hedge would like to readdress an overlooked complaint in which none other than the NASDAQ Stock Market LLC vociferously blasts the NYSE, the SLP program, and some of the underlying assumptions. Zero Hedge has discussed this issue extensively in the past, yet neither the SEC nor the NYSE (essentially, FINRA) seem to have ever addressed any of the NASDAQ's concerns. Zero Hedge believes the time has come for the later two regulatory organizations to provide some feedback to NASDAQ's concerns.
To summarize the concerns highlighted previously, as part of the NYSE's public solicitation for comments when launching the SLP program, only the NASDAQ provided its perspectives on this program. Keep in mind, one would have to be a very aggressive anti-conspiratorial vigilante to accuse the NASDAQ of being an enterprise which sees patterns where others don't (or assume impossible).
The key objections from the Nasdaq are presented below, and the entire paper is provided for our readers' convenience (highlights and italics added).
Taken together, the SLP Proposals provide NYSE with the unparalleled ability to burden competition for order flow and executions without explaining why such ability is necessary or even prudent. For example, the SLP Creation Proposal limits SLPs to firms that engage in proprietary trading, excluding NES and others that operate on an agency basis either to comply [*6] with Regulation NMS (in the case of NES) or by choice. NYSE fails to explain why this limitation is necessary or prudent. As stated earlier, NASDAQ has often been the largest liquidity provider to the NYSE and yet would be disqualified from serving as an SLP under the SLP Proposals.NYSE fails to explain why proprietary liquidity is more valuable than agency liquidity, or why proprietary liquidity should be favored over agency liquidity. NYSE claims that the proposal is designed to prompt liquidity provision but it simultaneously disqualifies large liquidity providers.
In NASDAQ's view, these irregularities reveal that NYSE's true motivation for the SLP Proposals is to discriminate among its members and to burden some members' ability to compete with NYSE. NYSE's failure to explain adequately either the operation or the rationale for its proposed rule is evidence that NYSE's stated basis for the proposal is a pretext. NYSE's proposals are a naked attempt to disadvantage one group of members -- those that compete with NYSE -- to benefit another class of members -- those that do not compete with NYSE...
Perhaps most surprising is the NYSE's aggressive attempt to implement these proposals on an immediately- effective basis. In doing so, the NYSE prompted the Commission to act inconsistently with past practice, inconsistently with its Rule Streamlining Guidance issued in July of 2008 n5, and inconsistently with its obligation to ensure that self-regulatory organizations comply with their obligations under Section 6 of the Securities and Exchange Act [*8] of 1934. NASDAQ, as an active proponent of the Rule Streamlining Guidance, is concerned that the NYSE will undermine that streamlining effort by attempting to leverage the Guidance in an inappropriate manner.
To support immediate effectiveness, the NYSE SLP Creation Proposal cleverly collects numerous past rule proposals that touch tangentially upon the topic of market makers and fees. None of the cited proposals is directly appurtenant to NYSE's SLP Proposals. For example, the Commission has not previously approved the creation of a new class of market participants on an immediately effective basis, and none of the cited proposals stands for that proposition. The Commission [*9] has not approved a new process for discriminating between members without requiring member representation or other governance protection for members. The NYSE attempted to overwhelm this weakness through sheer numbers of citations.
The NYSE has demonstrated there are many latent questions regarding its closeness with the main and only SLP provider, Goldman Sachs. In order to faciltitate the spirit of transparency and deobfuscation, Zero Hedge kindly requests that Mr. Ray Pellecchia answer these questions which not only the NASDAQ but Zero Hedge and its readers find of great interest.
Major developing story: Matt Goldstein over at Reuters may have just broken a story that could spell doom for if not the entire Goldman Sachs program trading group, then at least those who deal with "low latency (microseconds) event-driven market data processing, strategy, and order submissions." Visions of swirling, gray storm clouds over Goldman's SLP and hi-fi traders begin to form.
Back-up: This week's NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe's bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.
Even more odd, this "disappearance" comes hot on the heels of what Zero Hedge reported could be potentially a major change to the way the NYSE provides its weekly program trading report. Of course, Ray over at the NYSE immediately replied to Zero Hedge that all was going to be same as always ... Odd, maybe he meant that all is back to normal except the reporting of Goldman's trades. Either way, it might very well be time for proactive readers to again contact the two employees publicly disclosed by the NYSE as lead-contacts on the issue. Readers will recall that it was these same two who were previously steadfastly assuring anyone who would listen that there would be no change at all in data reporting.
Robert Airo, Senior Vice President, NYSE Euronext at (212) 656-5663 or AleksandraRadakovic, Vice President, NYSE Regulation at (212) 656-4144
Alas, the just released weekly data proves that either theirs was a material misrepresentation of facts, or Goldman simply suddenly decided to stop transacting with the NYSE, or, what would be even more sinister, Goldman notified the NYSE to scrap all their trading data from the prior week. Why would they do that?
Going back to Matt Goldstein's story. 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. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy over at 85 Broad (or maybe 1 New York Plaza, his detailed Bloomberg Bio page has disappeared) had the following responsibilities at Goldman Sachs according to Linked-In:
• Lead development of a distributed real-time co-located high-frequency trading (HFT) platform.The main objective was to engineer a very low latency (microseconds) event-driven market data processing, strategy, and order submission engine. The system was obtaining multicast market data from Nasdaq, Arca/NYSE, CME and running trading algorithms with low latency requirements responsive to changes in market conditions. • Implemented a real-time monitoring solution for the distributed trading system using a combination of technologies (SNMP, Erlang/OTP, boost, ACE, TibcoRV, real-time distributed replicated database, etc) to monitor load and health of trading processes in the mother-ship and co-located sites so that trading decisions can be prioritized based on congestion and queuing delays. • Responsible for development of real-time market feed handlers, order processing engines and trading tools at a Quantitative Equity Trading revenue-making HFT desk.
If the allegations are true, it looks like Goldman's hi-fi quant trading desk was thoroughly penetrated by a "spy", and as readers will recall, Serge(y)'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 Matt reports, he proceeded to move to a Chicago firm engaged in "high volume automated trading" where he would make 3x his $400k salary (Hey Getco, is it time for a formal release at least denying you guys had anything to do with this, cause if you did it might not look that hot. No matter, we have reached out to our sources in law enforcement to confirm or deny Getco's, and Goldman's, involvement: once we get a response we will immediately advise our readers).
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 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]?
The complete affidavit can be downloaded from this post here, and is also provided Scribed below as this could (and likely should) become a matter of National Security. Zero Hedge will closely monitor this situation from the European hinterland and provide updates as they come. For really interested readers, we recommend tracking any potentially new developments on the forums and message boards over at Wilmott.
Over the past two weeks many banks issued press releases and opened up the PR spigot to indicate just how stable they all are now that a few have managed to pay down their TARP commitments. This of course, is nothing but a complete farce, and simply yet another chapter in the "consumer confidence" game played by the administration and its financial underlings. In order to see just how much the banking system depends on the continued unlimited wallet of taxpayers and Geithner's printing presses, and how much certain law firms continue to depend on the somewhat less limited wallet of Wall Street, I present an October 31, 2008 letter recently obtained by Zero Hedge, in which Sullivan & Cromwell, Wall Street's #2 favorite law firm (or is that #1: I am sure Wachtell Lipton would have a few choice words with regard to that particular league table rating, although it may be hard pressed to match S&C's $241,975 in donations to the Democratic National Convention), goes to town to make sure that its well-deserving clients including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo get to not only have the taxpayers' cake (in perpetuity), but eat more and more of it each day. Before I get into the meat of the letter, it just has to be a complete coincidence, that these are exactly the same 9 firms that a mere 2 weeks prior to this letter was sent out had a rather direct head to head with the President's Working Group, during which each one was apportioned $x billion in TARP after exactly zero due diligence, in order to plug the dike of complete financial collapse with almost a hundred billion fingers of taxpayer dollars. But, as they say, once you've had a taste of the free buffet, you only want more and more and more. True to form: the banks promptly showed up for another serving, and Sullivan & Cromwell was gladly there to charge taxpayers at the preferential rate of almost a thousand taxpayer dollars an hour, compliments of one H. Rodgin Cohen (more on him later).
Now it is no secret that when it comes to taxpayer guarantees and subsidies, the TARP is and has always been mere window dressing: as a backstop tranche, it only has to do with equity values, which as any rational observer of the financial system (this list of course excludes the likes of Dick Bove) knows full well, are at best equal to zero if all the FAS 115, 157, Level 3, Mark To Magic and other accounting sleight of hand gimmicks were to be removed.
The math is simple: bank assets have to equal bank liabilities + equity. The liabilities are there (and growing), yet the assets shrink every single day backstopped by such solid collateral as emptying midtown office space CMBS, bankrupt hotel and Harlem multi apartment whole loans, and 2nd liens in Ukrainian and Argentinean bison farms. If equities were marked appropriately, shareholders would likely have to be paid to own a share of Citi or BofA.
Then again, caught in a massively engineered short squeeze over the past 3 months, financial stocks ended up bottlerocketing straight up, not on fundamentals, or even on charts, but merely on two large stock loan issuers (themselves participants in the list of nine mentioned above) making it not only impossible to short fin stocks, but forcing anyone currently short to cover. And while TARP manipulation serves at best to fool some outlying marginal retail investors into a false sense of calm, the TLGP is where the real action is. And as of May, there was a lot of action: $345 billion worth of.
One last background item worth pointing out is that recently the FDIC realized its Deposit Insurance Fund was on the verge of depletion, sucked dry by those very banks that seem to fall like dominoes every Friday (or lately Thursday, with the total YTD now passing an unprecedented run rate of over 100 for the year). Recall that the FDIC's primary responsibility is to make sure that come hell or high water, deposits are secured and insured. Well: surprise, they aren't, which is why in March Sheila Bair announced several emergency steps to restore the rapidly dwindling reserves of the FDIC, most notably having to do with charging incremental assessments to both depository institutions and bank holding companies (well that, and also tapping a huge line of credit directly with the Treasury in case Citi were to finally admit that it is nationalized in all but name).
Enter H. Rodgin Cohen and Sullivan & Cromwell, on behalf of the Ben's Big 9 Bailout Beneficiaries (BB9BB). The letter sent to the FDIC pretty much made it clear that banks want not only to gestate in the warm cocoon provided by taxpayers' dollar bill plastered abdomens, but to have immediate recourse to essentially unlimited FDIC funding at practically no cost to them for ever and ever.
Some of the key demands made by the BB9BB - S&C cartel include:
1. The FDIC guarantee should be an unconditional guarantee of timely payments of principal and interest when due backed by the full faith and credit of the U.S. government.
Goodness, we wouldn't want to have conditions when providing the entire American financial systems with a taxpayer-funded blank check now would we. A blank check with even one footnote of small print is inappropriate when dealing with the instigators of the biggest financial catastrophe since the Depression. So no fine print please. Done and Done.
2. Because the FDIC's guarantee expires on June 30, 2012, there should be an acceleration provision to June 30, 2012 in the event of default for guaranteed debt that matures after that date.
Wouldn't want forced short-squeezors, pardon, investors, to somehow think that there is such a think as risk in the banks' capital structures now, would we. In fact, this whole concept of risk, let's just do away with it entirely as the market trades merely on rolling buy-ins and follow on equity issuances. Done and Done.
3. If investors regard the guarantee as weak, they will look to institutions' underlying financial strength, thus lending to a tiered market where weaker institutions have insufficient access to liquidity.
What an abhorrent concept - judging a bank by its fundamental merits: the Horror, the Horror. How would the FDIC possibly allow a financial institution to be judged based on its "underlying financial strength": don't they realize that the BB9BB have made it all too clear that we now live in a communist regime where nobody can every fail based on their own "merits" and that everyone will be bailed out in perpetuity. How shallow: H. Rodgin Cohen, please explain to them how the system works. Done and Done.
4. Institutions should have the flexibility to issue senior unsecured debt not guaranteed by the FDIC, regardless of the stated maturity.
Yes Goldman, we realize you want to pay record bonuses even as unemployment hits 11% without starting a mass revolutionary uprising. Duly noted and Done and Done.
5. The Banking Organizations (BB9BB) agree with the FDIC that participating entities should have some mechanism to opt in or out of guarantees on a per issuance basis but believe that this option should not be limited to debt with stated maturities after June 30, 2012. [T]he Banking Organizations believe that this limitation will not achieve the FDIC's stated objectives [of not raping the taxpayer? of course, the BB9BB would like to interject here].
Hell, just make guarantees perpetual: it is not like the financial system will ever rebound. After all who are we fooling here? Well, aside from CNBC's primetime TV audience, wink, wink. Nonetheless, we advise readers to read the "cliff maturity" justification on or around June 30, 2012. This coincides nicely with the $1 trillion in CMBS that comes due about the same day. Should prove to be an amusing "day", "week", "month", "end of tenure" for whoever is president then. But who cares: that will occur at a time when the U.S. sovereign debt approaches something with a "quad" and ending in "rillion", and all the current BB9BB executives (long retired then) will have that 98th, 99th and 100th house in Cannes, Fiji and inside the crater of Mt. Etna. Done and Done.
6. We believe it would be appropriate to exclude public sector clients, banks and other financial institutions from because imposing a 75 basis point on deposit accounts for such institutions would eliminate the yield paid on these products and potentially encourage such institutions to move funds into higher yielding "unguaranteed" products, thus potentially reducing a participating entity's liquidity sources... Considering the current level of interest rates, the [BB9BB] believe that the 75 bp fee is too high with respect to the Federal Funds, and should be lowered. The high cost of insuring Federal Funds may lead institutions to other secured borrowing sources so that, in lieu of Federal Funds, financial institutions will, in order to mitigate their funding costs, increase their utilization of secured borrowings sources such as the Federal Reserve Discount Window, the Term Auction Facility and the FHLB advance program. Such an outcome would not achieve the FDIC's goal of improving short-term unsecured inter-bank funding markets [and, again, of not raping the U.S. taxpayer, which is so totally contrary to the lobbying effort contained herewith]
What irony: the BB9BB are demanding for unlimited guaranteed and unguaranteed backstops and someone dares to ask them to pay for it. If this isn't the most unhinged and inequitable concept the BB9BB have ever heard, then nothing is. H. Rodgin Cohen will set it all straight, and make sure that not only can banks borrow Fed Funds but taxpayers will have to pay them a portion of how much they borrow and at what rate. In fact the bank that recently ended up "borrowing" 7% Fund Funds was actually a lender, and H. Rodgin Cohen made sure that instead of paying 7%, they received that amount of money. Done and Done.
7. Under 370.6(e) there is a 150 basis point penalty fee and enforcement mechanisms for debt that is represented as being "guaranteed by the FDIC" but which exceeds the guaranteed amount. In order to enhance investor confidence in the Debt Guarantee Program, the Banking Organizations propose that investors be expressly allowed to rely on the borrower's representation with respect to the availability of the guarantee for a particular debt issuance.
You see, FDIC, it is simply unfair for investors and depositors to have an objective and unbiased representation. Especially since the BB9BB have every intention of abusing the guarantee/non-guarantee barrier at every possible occasion. However, this whole 150 bps penalty, well, that's just too rich for S&C's billionaire clients' blood. Let's cut a deal: the BB9BB will represent the debt in any way they want, and in turn, the FDIC will not only turn a blind eye to any and all (guaranteed) abuses that occur as a result, but also will not charge any penalty or enforce any actions against this outright abuse? Done and Done.
This and much more is contained in the attached missive, which was undoubtedly scribbled in short-hand by the BB9BB on the bent over back of one H. Rodgin Cohen. I recommend readers familiarize themselves with just how the world's most effective lobby power works when it hegemonic status quo is even remote threatened.
Which brings us to topic #2 for today, that of the mellifluously sounding H. Rodgin Cohen. Frequent readers may recall, that H. Rodgin Cohen, whose name rolls out like a haiku by a moderately drunk Basho, was supposed to become none other than Tim Geithner's right hand man, yet something odd happened on the greenback-bricked road which was supposed to guarantee H. Rodgin Cohen's unbridled immortality by having his portrait prominently featured on the $100 trillion bill. Just what was, as George Stephanopoulos noted, the "issue that arose in the final stages of the vetting process." While still on the topic of the haiku-esque H. Rodgin Cohen, many relevant questions brought up, and few answered, in this craftfully worded post by Tom Blumer of NewsBustes. I recommend readers familiarize themselves with the persona that nearly became TurboTaxTim in waiting. In the meantime, Zero Hedge will continue to present any and all lobby papers by Sullivan & Cromwell on behalf of the BB9BB, just in case H. Rodgin Cohen has decided to bypass the post of Secretary of the Treasury and apply straight for that of Overlord and Viceroy of all of Western Capitalism. With the backing of such "clients" as Goldman Sachs, he is essentially guaranteed to "win" that particular popular (or not)election.
