Goldman Sachs and the FIX

Discussion in 'Economics' started by truehawk, Jul 17, 2009.

  1. More peices of the puzzle.
    An interesting compendium of circumstances, some of which have been mentioned here before.


    The person Goldman Sachs recently had arrested, was a person who was a specialist in intercepting and indexing network routing information and may just possibly have used security access codes and built a system to acquire trading information PRIOR to transaction_commit time points at NYSE.

    The profitability of this split-second information advantage would have been and could have been extraordinary. Observed yielding profits at $100,000,000 a day.

    [summary to address complaints with respect to complexity.]

    GS has special access inside the system from its status assisting the Working Group on Financial Markets (colloquially the Plunge Protection Team) created by Presidential Order two decades ago. GC also acts as Special Liquidity Provider for NYSE.

    With 60% dominance of NYSE program trading, what's good for Goldman defines what shows as overall market performance.

    Control of to network and server access codes is unclear. A number of shops run their network and job control operations with UNIX shell scripts. Bloomberg and Merrill are typical. Problem with shell scripts is that they get run with superuser credentials -- soon as you have 1000 scripts, everybody gets access to the passwords.

    It doesn't have to be the "root" user. Any networking user with access to TCP can grab values from memory.

    Here is the most complex system that Mr. Aleynikov, the arrested employee worked on.

    Strategic Telecom Optimized Routing Machine

    Inventors: Sergey Aleynikov
    Assignees: IDT Corporation
    IPC8 Class: AH04M700FI
    USPC Class: 37922101

    The patent application is a public document:



    [0003]The strategic telecom optimized routing machine (STORM) suite of applications of the present invention provides computer-based call routing and management capabilities that are not constrained by limitations imposed by switch-based routing. Through the present invention, it is possible to achieve an improved profitability margin for each call, and quicker responses to carrier outages. STORM routing also more effectively achieves call routing with economic efficiency that satisfies individual customers' business needs.

    [0004]To overcome the problem of switches being "unaware of each other," changes to routing options are no longer made offline and loaded onto the switches. Rather, the routing function is removed from the switches and placed on a server. This overcomes limitations in switches, which previously prevented the telecommunications provider from maximizing all possible carrier supplied rates.

    [0005]Additionally, through the present invention, it is possible to route incoming calls on paths that are tailored to the individual customers' needs. It is also possible to change routing parameters based on the time of day (e.g., multiple peak and off-peak time periods). Through the present invention routing alterations may hit switches at desired intervals (e.g., instantly or after 15 minutes, etc.), which enables improved network performance.
    Nice telecom system control. Uses servers -- or cycles at the switches -- to monitor packets in real time. One big trick is getting this software to run on the distributed assets of the system -- which in turn depends on getting the passwords to the switches, which can be changed daily.

    If you've got a way to get the passwords, the implementation software for this STORM system is perfect for installing programs to capture text streams.

    Back a few years ago, Oracle bought a company Triple Hop -- formerly of South Tower WTC -- because they had worked out a solution to this implementation problem. They did a first-rate job. Triple Hop used its access and remote programs to build text indexes at the target systems. It is more efficient to build-and-move these text indexes than to copy enormous volumes of text to a central server and build the indexes in one place.

    Front-end messaging for NYSE is done with small text messages. FIX Protocol messages are tiny things -- less than a k. Encryption is optional or nonexistent or easily enough made transparent. NYSE has any and all access codes involved.

    A quick look at IDT Corporation:

    This assignee, originally "International Discount Telecommunications," shows them as Integrated Technology Corporation of Newark, New Jersey, with tag "IDT" on NYSE. IDT does phone cards and international call centers.

    IDT lost $43,000,000 on operations in 2007. Stock price has fallen from $50 to $1.75 over the last 5 years. Desperation setting in at IDT ? Stock price hit a bottom at $ 0.72 last December 15th.

    There has been no interruption to financing, no pause to this IDT buying assets. IDT bought Zedge -- a Norwegian comic book publisher serving 11,000,000 online nerd-heads -- and 75% of American Shale Oil Corporation. Funny mix.

    The offices and call centers spread out worldwide: London, England; Guadalajara, Mexico; Jerusalem, Israel; and San Juan, Puerto Rico. Nothing in Russia.

    In any case, IDT is not in the business of managing large telecom networks, which belong to huge companies. The telecoms generally do not seek outside help and never run someone else's non-vendor distributed software on their gear. (Voids warranties.) IDT sells phone cards. The how and why and what of this Mr. Aleynikov hooking up with IDT Corporation remains a mystery.

    FIX Protocol, OCX, SWIFT -- messaging, transaction commit_timing and split-second vulnerability.


    The flow to carry out financial transactions can be complex at the detail level. But if we make logical blocks for the different stages, overall patterns have a steady flow.

    The Financial Information eXchange ("FIX") Protocol is a series of specifications for the electronic communication of trade-related messages. ISO 15022. FIX is used for NYSE stocks and for the options markets. FIX can also be used to support fixed-income trading activities for the following fixed income asset classes:

    * US Treasury Bonds
    * US Corporate Bonds
    * Municipal Securities
    * Agency Securities
    * To-Be-Announced (TBA) Mortgage Backed Securities
    * Euro Sovereign Bonds
    * Euro Corporate Bonds
    * US and European Commercial Paper

    HERE is the page for the bond markets at FIX Protocol dot org.

    Flow can go like this:

    -- IoI: Indication of Interest to negotiate a deal. Similar to Trade Adverts. States the asset (by CUSIP number code) up for bid/offer

    -- Quote Request
    -- Quote
    -- Quote Response
    -- Execution Report

    All you need are the Execution Reports. CUSIPS, quantities, and prices will do it.

    These trade events happens out in the front-end, prior to communication of the data to the Exchange. Messages go through the internet, local networks and sit on middleware application servers, as well as being stored on databases. FIX and SWIFT are compatible -- the aim of these systems is to make trading efficient, moving to support Straight Through Processing (STP.)

    Access to FIX, OCX or SWIFT messages prior to transaction_commit at the Exchanges would give a player an advantage parallel to seeing an opponent's cards in a game of poker.

    We had always worried about information leakage, as a prospective/in-process deal could be anticipated with a play in the related options market. A Retail Working Group had this up for discussion, but that Group is now inactive. The technical Encryption Working Group was replaced by a Global Technical Committee's Information Security Subcommittee. Goldman Sachs participates through two individuals in UK: James Bywater and Richard Van Horn. There is no interface to the U.S. National Threat Assessment Center.

    The market is a system of liquidity providers, who cushion open market trading mechanisms. One fact, since STP tools arrived, is the fact that the vast majority of transactions in today's market are in fact high frequency, small block trades that cross between the quant funds and program traders.

    Retail and customer driven buy/sell orders are the leasser part of NYSE markets. Zero Hedge calculated that the S&P was up-ticked by 60 points from this pattern -- as liquidity inflow forced artificially high stock prices.

    The key players operate in this is market predator/prey stratum, top rung of multiple split-second traders, from which the big players are Renaissance Technologies Medallion, Goldman Sachs and Global Electronic Trading (GETCO.)

    Goldman doubled quant market share. Increased profitability of the quant unit so that it was carrying the whole company, couple months back.

    Mr. Aleynikov, the charged ??? They want us to think that he was just some doofus, who played with the GS network. A $400,000 a year version of the nerd-spokesperson cell phone guy in television ads. (The bland one who shows up all over the damn place with 5-bar signals and his 1,000-employee network support crew.)

    Sure. Trust that.

    BTW: Zero Hedge has careful statistical analysis of what is going on. Bottom line is a 6-sigma proof of distortion. The "why" and "how" of the distortion is what goes outside the NY Times-printed claim that GS developed a super-math engine.

    ABTW: Matt Taibbi is another wet-behind-the-ears optimist.
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  3. I'm not that me out:

    basically GS is using a program to intercept network traffic to determine, milliseconds in advance, when other participants will be active in the electronic market by detecting changing levels and types of network traffic....

    This happened a few years ago in Chicago, can't remember exactly.

    If this is a case, GS needs to be shuttered and we consider bringing back the pits....
  4. What by the way may be a very good idea...
  5. Goldman employed a guy that patented a method of superfast traffic routing for telecom. The FIX tag making the offer to buy is sent prior to execution commit.
    Until the July 2ed Juniper switch upgrade of part of their system, the latency on the NYSE Euronext was 150ms (milliseconds) compared to 50ms for the Nasdaq OMX, BATS Exchange and Direct Edge. That means that the NYSE's switches WERE realative old and slow and that much faster processors exist, and that an enity with the new equipment, and the right code would have had plenty of time to to decipher the FIX messages and do what comes naturally.

    A really fast program such as that Goldman's former Russian employee patented while working for a really oddly composed company would be pretty close to the right code.

    It's like finding a set of burgler's tools in someone's drawer.

    Now weather they were adding liquidity value by buying on offers to sell, and selling on offers to buy really fast (just be doing what MM are supposed to do only faster), or they were using that edge in speed to put their own orders in front of the order flow of their customer is the question.

    But does one make a 100m a day from ordinary MM activity?
  6. The avenue of execution is flawed.

    As a trader, I'm all about exploiting such inefficiencies -- after all, that's my job.

    There's a thin like between economics and ethics. (profit motive versus doing what's right).

    Personally, I don't care what GS is doing to game the system, after all, they are competing with other organizations who are attempting to achieve the same thing. If I figured out a way to extract millions from the market based on a technical inefficiency, I'd do it all day long until it was corrected. When the correction arrives, I move on to the next thing without demanding recompense.

    Is Goldman Sachs operating in this manner?
  7. new$


    I'll be 70yo this yr-this is a stretch for me.
    Am I to understand that GS has the ability to electronically front run the whole market?

  8. No. The way Goldman is operating is *beyond* competitive. They and their Washington buddies screw the taxpayers and the average trader/stockholder out of $billions through manipulation & thievery in every way they can.

    And the fact that NO ONE in Washington is demanding their breakup points to the system being bought by these crooks.

  9. I wouldn't care if Goldman was MM, or a lender, or an investment bank, or any one of various categories within their conglomeration...EXCLUSIVELY...

    Sad fact is they're leveraging one against the other. IB/credit fucks up, they're collecting funds from the federal government to "create liquidity" in the financial derivative markets.

    Cliches: Privatizing gains, publicizing risks. Accounting shifts.

    Yeah it's wrong, but in this f'd republic, 99% of the population doesn't understand.

    Harkens back to the Napoleonic Rothschild Paris-London connection.

    Just worried about my USD denominated trading account, 401k, etc.
    #10     Jul 18, 2009