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Moneybrawl: Michael Lewis Takes on Goldman Sachs, HFT

The author of Moneyball takes us inside how Goldman Sachs pushed to have its former top coder, Serge Aleynikov, placed in handcuffs and how the firm barely has a handle on high-frequency trading even today.

When the author of Moneyball writes a take-down on Goldman Sachs, you pay attention. Michael Lewis, the famed contributing editor of Vanity Fair and a former bond trader, takes us inside the trial of Serge Aleynikov, the ex-programmer who was arrested and found guilty of stealing intellectual property from Goldman Sachs as he prepard to leave for a new job. It’s a hell of a story.

Although he has been released from jail on his eight year sentence -- and since re-arrested on state charges -- Aleynikov and his case shows that Goldman Sachs can move mountains when it comes to pressuring the federal government to do its business. And the Russian-born programmer remains the only Goldman Sachs employee to be arrested since the credit collapse of 2008. Critics don’t call them Government Sachs for nothing: the investment firm not only pushed for their former employee’s arrest, Lewis alleges that the judge in the case was a lackey who all but delivered for the powerful and well-connected investment firm.

[Hackers to global stock exchanges: You’re next!]

As with any Lewis piece, it’s a story of little guys vs. the big boys, lots of smart people adapting to a changing world, and tons of great details that illuminate the dumb things that smart firms do. Thanks to pop culture masterpieces such as The Godfather, Good Fellas and The Sopranos, we know what life is like in the Mafia bit we barely know what life is like in the most feared investment firm on the planet. Thankfully, Lewis takes us inside the Death Star of the financial district in lower Manhattan. Here are some key details of life inside GS:

How to interview for a job inside Goldman Sachs:

Goldman Sachs put Serge through a series of telephone interviews, then brought him in for a long day of face-to-face interviews. These he found extremely tense, even a bit weird. “I was not used to seeing people put so much energy into evaluating other people,” he said. One after another, a dozen Goldman employees tried to stump him with brainteasers, computer puzzles, math problems, and even some light physics. It must have become clear to Goldman (as it was to Serge) that he knew more about most of the things he was being asked than did his interviewers. At the end of the first day, Goldman invited him back for a second day.

Goldman's ancient IT from Hull Trading actually causes MORE latency:

[The HFT latency Sergey discovered] could be caused by computer hardware. (The top high-frequency-trading firms chuck out their old gear and buy new stuff every few months.) But it could also be caused by slow, clunky software—and that was Goldman’s problem. Their high-frequency-trading platform was designed, in typical Goldman style, as a centralized hub-and-spoke system. Every signal sent was required to pass through the mother ship in Manhattan before it went back out into the marketplace. "But the latency [the five milliseconds] wasn’t mainly due to the physical distance," says Serge. "It was because the traffic was going through layers and layers of corporate switching equipment."

But Goldman is too cheap to update their IT:

Serge came to the conclusion that the best thing they could do with Goldman's high-frequency-trading platform was to scrap it altogether and build a new one from scratch. His bosses weren’t interested. "The business model of Goldman Sachs was if there is an opportunity to make money right away, let's do that," he says. "But if there was something long-term, they weren’t that interested."

Why Russian programmers are valued so highly on the Street:

He'd been surprised to find that in at least one way he fit in: more than half the programmers at Goldman were Russians. Russians had a reputation for being the best programmers on Wall Street, and Serge thought he knew why: they had been forced to learn programming without the luxury of endless computer time. "In Russia, time on the computer was measured in minutes," he says. "When you write a program, you are given a tiny time slot to make it work. Consequently we learned to write the code in a way that minimized the amount of debugging. And so you had to think about it a lot before you committed it to paper... The ready availability of computer time creates this mode of working where you just have an idea and type it and maybe erase it 10 times. Good Russian programmers, they tend to have had that one experience at some time in the past: the experience of limited access to computer time."

In a companion piece, Vanity Fair interviews Lewis, a former bond trader back in the 1980s when the first mortgages were bundled and sold as securities. Lewis doesn’t pull any punches in his disdain for high-frequency trading and how Goldman Sachs would thrive in a totalitarian state. Here’s his two cents on HFT:

Vanity Fair: So, proponents have argued that high-frequency trading has made markets more liquidity?

Michael Lewis: Hah!

Vanity Fair: Critics say it has become more volatile. Who exactly is hurt by the competitive advantage offered by high-frequency trading?

Lewis: It's essentially a tax on productive investment, and it's a tax that’s largely unnecessary. The reason people aren't more outraged about it is that the cost of financial intermediation in the stock market -- the old-fashioned stockbroker system -- has gone down because of the technology. There is this whole separate question, which I'm actually not prepared to answer right now: has it introduced new instabilities in the markets for which we all pay a price? I suspect so, but I don't know. What I know is not true is that high-frequency trading provides liquidity.

There’s a line in The Big Short; one of the characters, who was cynical about the subprime-mortgage market, says, "When I hear Chinese Wall, I think you’re a f---ing liar." I feel that way about liquidity. When I hear the word liquidity, I think you’re a f---ing liar. If this is liquidity, we don’t need it.

It’s a great read. Download it on your iPad and check it out on your downtime this summer. And if you’re an IT vendor with some spiffy new HFT gear, you should pay a call at the IT museum formerly known as Goldman Sachs. Tell them Michael Lewis sent you.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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