Goldman formula may have been stolen

Bob Moon Jul 6, 2009
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Goldman formula may have been stolen

Bob Moon Jul 6, 2009
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Kai Ryssdal: This next item might be the financial industry’s equivalent of stealing the secret formula for Coca-Cola. Or maybe the colonel’s famous recipe of 11 herbs and spices. At the very least, it’s a great case of corporate espionage. Stock trading, a lot of it done by computers, is often measured in microseconds. So the big Wall Street firms each rely on their own specially-crafted computer programs to give them an edge.

Goldman Sachs, for one example, has made hundreds of millions of dollars on what’s known as program trading. But our senior business correspondent Bob Moon reports there’s word today that Goldman’s secret formula may have been compromised.


BOB MOON: The FBI accuses Russian-born Sergey Aleynikov of taking more than just what he knew about his former employer’s trading practices. He’s charged with copying secret mathematical computer formulas used to make highly-profitable trades.

Andrew Lo is computer trading expert at MIT. He says there’s an ongoing arms race of sorts in the financial world.

ANDREW LO: If you have a better computer system than your competitor’s, to be able to process all of your clients’ orders in a much more timely and price-effective manner, you’ll actually be able to save your clients’ money.

And, of course, make huge amounts of money in the process. Lo says that’s why the financial giants invest so much in these secret formulas.

LO: It’s hundreds of man-years of effort. They hire armies of PhDs in economics, finance, mathematics, computer science, physics. And, of course, it is an arms race in the sense that when they develop a slight advantage, then other firms are going to try to figure what those are and implement the next generation.

Goldman Sachs isn’t even confirming that it is the generically-named “financial institution” listed in the FBI complaint. But New York Stock Exchange figures suggest Goldman may have suspended much of its program trading recently. At the University of California at Berkeley, financial innovation expert David Leinweber says that might be an overreaction.

DAVID LEINWEBER: I think they may be erring on the side of panic. This is one of those things where if you knew the formula for going to the moon, could you get to the moon?

Leinweber says there are only a few firms really big enough to benefit from such a leak.

I’m Bob Moon for Marketplace.

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