National Security & Intellectual Property II

I have written about the recent purported computer software code theft at Goldman Sachs Group Inc in my post dated Jul. 6, 2009. Developments in the past 72 hours support the idea that Sergey Aleynikov intended to use the computer files he allegedly stole from his former employer in his new job.

He uploaded compressed program code files for an automated low latency stock trading software platform he helped develop at Goldman Sachs onto a server overseas. The number of files was so large that the compressed RAR file archive supposedly topped at 32 MB in size. Assuming text files and 23% compression, Sergey copied roughly a whopping 140 MB of code, that is almost three times the size needed to install a small operating system like Minix. Compiled, the code could produce binaries for a 300 MB application, approximately a third of Microsoft's Office suite.

Today, Svea Herbst-Bayliss and Christian Plumb report in their post on Reuters that the three founding members of the startup Teza Technologies LLC, that had wooed Sergey from Goldman Sachs for three times the salary, were sued by their own old employer, Citadel Investment Group, for violation of noncompete clauses. Citadel of Chicago manages hedge funds. The three worked in the quantitative trading branch of Citadel using automated high frequency methods which yielded extraordinary returns last year.



In all likelihood, the foursome planned to use the fruits of their labor at their respective former employers for the development of an own low latency quantitative trading platform. Could they have manipulated the market? Did their plan threaten national security?

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Addenda

• According to Laurence Fletcher's post on Reuters this afternoon,  Sergey's transferred files were accessible on the server abroad until last Monday. Sergey allegedly transferred them in the days before he left Goldman Sachs at the beginning of June. Hence, there was potential access to the data for about a month (07/10/09).
• The owner of the service that hosted Sergey's upload recounts his experience in the past week here. Note that this company's home is in the U.K., whereas its servers are located in Bavaria (07/13/09).
• Rob Iati summarized the fundamental implications of low latency high frequency trading (HFT) in his post on advancedtrading.com dated Jul. 10, 2009 (07/17/09).
• Today, Jonathan Spicer reports in his post on Reuters about the role of flash programs in high frequency trading, like Direct Edge's Enhanced Liquidity Provider (ELP). Direct Edge flashes stock orders to select costumers for milliseconds, giving them a peak preview of the order flow. In combination with high frequency trading platforms that access dark pools matching orders anonymously, the ELPs may create a two-tired trading system, disadvantaging traders who cannot execute such fast trades. Direct Edge is owned by a consortium consisting of Citadel Investment Group, Goldman Sachs Group Inc, JPMorgan Chase & Co, Knight Capital Group, and International Securities Exchange LLC (07/27/09)
• According to Grant McCool's post on Reuters today, the case USA versus Aleynikov (09-mj-01553, U.S. District Court for the Southern District of New York) may find a quiet, anticlimactic ending. In any case, Sergey's alleged theft brought the potential dangers of HFT to the attention of the media and the public (08/03/09).
• According to Alex Berenson's post on The New York Times yesterday, the size of Goldman Sachs'  HFT program is 1,224 MB. Sergey transferred no more than a quarter of that (08/24/09).
• Today, Sergey Aleynikov appeared in federal court for the first time and pleaded "not guilty" to all charges of code theft from Goldman Sachs.  The trial is scheduled to begin Nov. 29, 2010. The case is now assigned as "USA versus Aleynikov, U.S. District Court for the Southern District of New York, No. 10-00096" (02/17/10).
• According to Chad Bray's report with the title "Ex-Goldman Programmer Found Guilty in Code Theft" published online in The Wall Street Journal today, a jury found Sergey Aleynikov guilty of theft of trade secrets and transportation of stolen property. Read Ted Thomas' insightful comment on high frequency trading added to this report (12/10/10).
• According to Grant McCool's post with the title "Ex-Goldman programmer gets 8 years for code theft" published online on Reuters yesterday, Sergey was sentenced to eight years in prison. I presume he will appeal the sentence (03/19/11).