By now, I think most people have heard about the ex-Goldman software programmer who was arrested in July for allegedly stealing some of Goldman’s high-frequency trading software code. I am not a criminologist or legal expert, nor am I a software expert that could tell you if accidentally sending small pieces of the code while sending other software to an outside server in Germany is a plausible defense. But, I do want to touch on one piece of the story.
No Bailout for Programmer
According to Alex Berenson of The New York Times, a federal prosecutor asked that Sergey Aleynikov, the ex-Goldman programmer, be held without bond because the software could be used to “unfairly manipulate” stock prices. It took me a little while to understand why I kept coming back to that sentence, until it struck me that a federal prosecutor was asking for a man to be detained without bail for being such a dangerous force to society by having Goldman’s proprietary high-frequency trading program, or actually just a small piece of it (32 megabytes of the 1,224 megabyte code).
I want to mention that the prosecutor might have used the “potential” danger of possessing this code just to keep a man behind bars, which is the job of the prosecution. However, if the prosecutor believes that this program has the ability to upset financial markets and send society into economic upheval, why should Goldman have the right to manipulate the markets? Goldman Sachs has the platform and capital to take advantage of high-frequency trading, and quite simply, Sergey Aleynikov does not.
An Afterthought on High Frequency Trading
I want to say that I don’t particularly see a problem with brokerage firms using high-frequency trading programs. For years and years, floor traders have been using strategies to squeeze out some extra money on bid-ask spreads and getting in ahead of orders for large blocks. Electronic trading has squeezed the profitability of capitalizing on bid-ask spreads, and trade orders come in so fast now that no human would be able to keep up. High-frequency trading programs allows trading firms to use their old world strategies with new world technologies to make money in the modern day exchanges.
Furthermore, I would suggest that high-frequency trading is not the danger that the federal prosecutors make it out to be. If a programmer steals software from his old employer, he is a criminal, but is he a criminal mastermind capable of causing damage to the financial markets that would warrant holding him in jail during his trial to protect society? I mean, the strategy is profitable, but if the big investment banks were capable of manipulating the markets with software, why would the Goldman’s and JP Morgan’s of the world need a bailout in 2008?