According to Bloomberg News, Sergey Aleynikov, the former Goldman Sachs Group Inc. computer programmer arrested last week for stealing software, told an FBI agent he uploaded proprietary code to an encrypted server he had used on “multiple occasions.” Mr. Aleynikov, 39, told the agent about 1 a.m. on July 4 that he had logged into Goldman’s computers through remote access from his home and sent encrypted files to a repository server with the URL identifier svn.xp-dev.com, according to a copy of his FBI statement in court files in Manhattan federal court.

The Bloomberg News story goes on to explain that Xp-dev.com is run by a London resident Roopinder Singh, who describes himself on a blog linked to the website as "a trading systems developer working in London's financial services industry". That website offers "subversion hosting." Subversion, commonly referred to by the acronym SVN, is a common version of source control software that allows users to track current and previous versions of programming code and other documents. [Toomre Capital Markets LLC ("TCM") uses two competing products known as CVS and Microsoft Visual SourceSafe to manage its programming source files that are part of either internal or client projects.]

On July 9th 2009, another legal shoe dropped in the case of Sergey Aleynikov and his would be new employer Teza Technologies. Ken Griffin's Citadel Investment Group is now suing its former head of high-frequency trading Misha Malysev and two other former employees, Jace Kohlmeier and Matthew Hinerfeld, alleging that their formation of a new trading firm violated a non-compete agreement they had with Citadel.

As The Wall Street Journal reports, "The identity of Malyshev's new firm, Teza Technologies LLC, became very public this week, when it said it hired and subsequently suspended former Goldman Sachs computer programmer Sergey Aleynikov. Aleynikov has been charged by the U.S. with stealing computer code from Goldman's high-frequency trading business. Aleynikov and his lawyer have asserted that any violation was unintentional, and that he didn't distribute any codes obtained from Goldman."

The Citadel complaint was filed in the Chancery Division of Cook County, Illinois Circuit Court. The complaint asks the court for an expedited hearing in the case, saying that Teza could cause "irreparable" harm to Citadel. It also mentions the Aleynikov affair, stating, "Teza's decision to hire Aleynikov, an accused software thief, creates a substantial risk that they have stolen, or may be planning to steal, Citadel's proprietary code."

As part of the complaint, Citadel attached copies of the non-compete agreements and resignation acceptance letters of the former employees. Malyshev's agreement states that for nine months following his February 2009 departure, he cannot start working for a "competitive enterprise" or use "quantitative analytics which are based on information that is proprietary to Citadel and which I either utilized or developed when I was employed by Citadel." The WSJ notes that Citadel's non-compete agreements are widely considered to be among the more stringent in the hedge-fund business.

On Monday July 6th 2009, various news outlets are reporting on the rather brazen bank theft by one Sergey Aleynikov. Rather than brandishing a gun or cracking a vault, Sergey hacked the algorithmic trading secrets of his then-employer Goldman Sachs by downloading proprietary, "black box" computer models that Goldman uses to execute rapid-fire trades in the financial markets. The value of this intellectual property, experts say, could be incalculable.

Toomre Capital Markets LLC ("TCM") has written extensively about the topic of Algorithmic Trading. Interested readers, for instance, might want to review the white paper entitled Market Risk and Algorithmic Trading that TCM wrote on behalf of Advanced Micro Devices some months ago. As that paper starts,

In the evolving financial markets, ever-more complex quantitative analyses are performed. Some constantly assess the market risk of portfolio exposures, while others calculate the probability of reward for various strategies in the continually shifting markets.

Increasingly, algorithmic trading programs automatically execute the trade orders that result. With the growing adoption of the AMD Opteron™ processor, high performance computing for quantitative modeling and algorithmic trading in the financial markets likely will increase.

Simulation modeling techniques quantify market risk, measuring the probability and magnitude of potential loss due to change in prices. As market liquidity decreases, typically price volatility and, hence, market risk increases. With the recent introduction of decimalization, the U.S. equity market structure dramatically changed. Trading spreads shrunk, trading venues proliferated, and market liquidity fractured. As a result, a new form of trade execution emerged: algorithmic trading.

A top story of the day on many of the news outlets is about Sergey Aleynikov, the thirty-nine year-old former vice president who allegedly stole trade secrets from Goldman Sachs and stored them on a foreign server. The breathless headlines are staggering. Code theft could cost Goldman millions, US says, To Catch a Rogue Quant, Russian Said to Be Ex-Goldman Worker Charged in Theft and The Dumbest Man at Goldman Sachs.

As President Obama visits Russia, the homeland security, terrorism and anti-immigrant blogs are abuzz about the alleged Russian spy. You have to look hard to find the headline, Goldman sees no impact from computer programmer-source. It isn’t as exciting.

Before Aleynikov is hung for international espionage, I thought it would be good to dig a little bit deeper into what happened. According to the an affidavit by Michael G. McSwain entered into the Southern District of New York, FBI agent McSwain charges Mr. Aleynikov with “unlawfully, willfully, and knowingly, without authorization, copied, duplicated, sketched, drew, photographed, downloaded, uploaded, altered, destroyed, photocopied, replicated, transmitted, delivered, sent, mailed, communicated and conveyed, a trade secret that is related to and included in a product that is produced for and place in interstate and foreign commerce with the intent to convert that trade secret to the economic benefit of someone other than the owner thereof, and intending and knowling that the offense would injure the owner of that trade secret, to wit, Aleynikov, while in New York, New York, and elsewhere, copied, without authorization, proprietary computer code belonging to a financial institution in the United States and then uploaded the code to a computer server in Germany.”

Sometimes it helps to search for certain key phrases among the many news sources that are indexed by the Google News search service. A search for the term "Lars Toomre" on Friday October 12th 2007 reveals that Mr. Toomre was quoted by eFinancialNews in an October 1st 2007 story entitled Dow Jones’ News Feed Makes Headlines.

During the past few weeks, Lars Toomre has been working from a client site (a top-ten hedge fund by size located in Manhattan) together with some members of the great team from G2 Systems, LLC. As a result of the long hours completing this particular project and the additional hours commuting, there has been little time left for writing and then updating this website on a regular basis.

In the financial markets, the week that includes July 4th normally is relatively quiet with many people away for at least some portion of the time. That hardly was the case this year at Toomre Capital Markets. This past week three incoming contacts reminded Lars why it is so important to somehow create time for sharing his thoughts and observations, despite all else that may be going on.

Back on July 27th 2006, Toomre Capital Markets LLC ("TCM") highlighted Reuters' pursuit of "machine readable news" for algorithmic trading applications. Reuters eventually released two products in December 2006 aimed at the direct feed of economic statistics and company earnings information into quantitative algorithms.

On March 5th 2007, Regulation National Market System ("Reg NMS") will go into effect for the United States stock markets. Designed to even the playing field between U.S. stock exchanges and rival electronic trading platforms, these regulations require one exchange to route customer orders to other trading venues that display a superior price execution. The goal is to ensure that customers get 'best execution' on each and every one of their stock and equity option transactions, while eliminating the current practice of 'trade-throughs' (ie executing an order at an inferior price than that currently available nationally) and encouraging the greater use of limit orders.

Late on Friday March 2nd 2007, the New York Stock Exchange ("NYSE") asked the Securities and Exchange Commission for a partial delay in adopting the new Reg NMS rules with certain alternative display facilities such as Direct Edge, LavaFlow Inc., and Track Data Securities Corp. The NYSE also apparently needs more time to connect with the International Securities Holdings Inc., which is in the midst of rolling out its equities trading. None of those trading platforms are plugged into the broadly used Intermarket Trading System, which is what the NYSE and other major exchanges use to route orders. There is no indication yet of how the S.E.C. will react to yet another request for a delay.

In response to yesterday's post Event Driven Architecture - Event Processing Moving Forward?, several other sources of information on Event Driven Architecture have been highlighted. One is a new blog by the leaders of the Apama team over at Progress Software. Another is the web site of the Aite Group.

Another reader suggested that Toomre Capital Markets LLC ("TCM") also highlight the other major vendors of software for an Event Driven Architecture. In addition to Streambase Systems (whom we mentioned is a client of TCM), other significant players in the event processing space include: TIBCO BusinessEvents, Progress Apama, Coral8, Aptsoft, Aleri, Kaskad, KX and Vhayu.

At present, the two largest vendors in the financial services vertical are probably TIBCO and Progress Apama. However, one must always take vendor reports of number of customers with a grain of salt in the financial services space since so many financial firms request anonymity as a condition of their contractual arrangements.

No doubt there are pluses and minuses to each one of these respective vendors. However, Toomre Capital Markets LLC would like to reemphasize that leading financial firms need consider the competitive advantage that Event Driven Architecture provides in the move to real-time (and continuous) trading, near real-time Enterprise Risk Management, and near real-time compliance applications.

If the reader has any questions, please feel free to contact Toomre Capital Markets LLC as indicated below. Reader comments and thoughts are welcome.

There is considerable and growing interest in how to automate the intelligent processing of various information events (or more technically changes in state values like, for instance, changes in the price of a particular stock).

Various technical terms have been used to describe this new paradigm of processing information. Phrases such as Complex Event Processing ("CEP"), Event Stream Processing ("ESP"), and Business Event Management ("BEM") are bandied about. Potential users, business managers and IT managements are confused by what these various terms mean and how, if at all, they differ from one another. They often ask, "How does CEP differ from what they now do with custom C++, Java or C# coding and traditional SQL data bases?"

Toomre Capital Markets LLC ("TCM") would suggest that the all of above terms are really one in the same. As a result, as TCM continues its discussions with various financial firms, hedge funds, asset managers and financial intermediaries, henceforth we are going to refer to CEP, ESP and BEM all as part of the new (and likely) disruptive new technology paradigm called Event Driven Architecture ("EDA"). TCM is not the first organization to use this term, but have found that it is more easily understood by business managers in the financial services and capital markets vertical.

The Wall Street & Technology blog asks Can the Market's Systems Keep Up With Electronic Trading? That is exactly the same question that Toomre Capital Markets LLC ("TCM") has been asking for the several months with the forthcoming implementation of Regulation NMS on March 5th 2007. And the answer on both February 27th and 28th 2007 at the New York Stock Exchange was a resounding NO!!!

Many people do not fully appreciate just how the shifts in the United States equity market structure are impacting the systems technology for market making systems. As the average size of a completed transaction on the NYSE has shrunk from something like 3,000 shares per transaction in 2000 to perhaps under 400 shares per transaction today, the total volume of shares traded has continued to grow.

On February 27th 2007, Advanced Micro Devices ("AMD") and several other large technology companies like Hewlett Packard, IBM, Sun Microsystems. Intel, Dell, and Microsoft put aside their fierce competitive differences to form a new non-profit board called Green Grid. The new group's goal is to decrease the amount of energy used by data centers and the many servers often stuffed therein.

Green Grid plans to create standards and new technologies that will improve energy efficiency for servers and data centers. The new group will welcome addition members with the proviso that they pay a membership fee. As Bruce Shaw, director of worldwide commercial marketing for Advanced Micro Devices, said, "For 11 partners and also fierce competitors to come together and agree to put aside our differences, it's pretty special."

Toomre Capital Markets LLC ("TCM") would like to point out an interesting point of view article recently published by IBM Global Services. Entitled Algorithms for Financial Markets, this article gives some good perspective on how what the transaction environment will be like when algorithmic trading is persuasive across many market sectors.

Clearly, a significant portion of the liquid trading business will be run on machines co-located at exchange or trading center data centers. In those environments, the speed of completing the loop of receiving new market quote information, making some calculations, and then executing the trade order really matters. Cutting milli-seconds or even nano-seconds out of the process will be really important and a key to being a liquidity market leader. (Financial firms and trading centers wanting to compete in this sector should look at StreamBase Systems for their extremely fast Complex Event Processing engine.)

On February 19th 2007, The Wall Street Journal published out of London a story written by Adam Bradbery entitled Futures Traders Take On Next Hot Model. This article points out how algorithmic trading is quickly catching on in various European futures contracts. In fact, at Euronext.Liffe, the London derivatives exchange owned by pan-European stock-exchange operator Euronext NV, machines are the "the top three traders in its flagship euro interbank offered rate, or Euribor, three-month interest-rate futures contract," and "algorithmic trading accounts for 20% of turnover in the contract. It doesn't have comparable figures for a few years ago, but a spokesman says there has been 'tremendous growth' in this area."

The article continues with information about the growth of algorithmic trading in other futures markets. "German-Swiss exchange Eurex AG, owned by Deutsche Börse AG and SWX AG, estimates algorithmic trading makes up 15% to 20% of its overall business. U.S. futures exchanges say they are experiencing big growth in model trading. The Chicago Mercantile Exchange says activity from models is growing on its exchange but it can't track the amount."

As highlighted on Finextra.com, Chris Skinner has written an informative commentary on developments in cross-asset trading and the search for liquidity. Entitled The Quest for Alpha, this article should be a must read for all capital markets and risk management professionals who are interested in the subjects of liquidity risk, electronic and algorithmic trading, hedge funds growth (and influence), and the on-going technology transformation in a trading world where nano-sconds matter.

Alpha is that part of investment return that an asset manager or hedge fund produces that is uncorrelated with general market returns (often referred to as Beta). High Alpha returns generally also very richly reward "long/short" investment professionals under incentive compensation schemes such as hedge fund "Two and Twenty" fees arrangements. Toomre Capital Markets LLC ("TCM") previously has written about True Alpha and Hedge Fund Beta in highlighting two excellent articles written by Clifford Asness. Mr. Asness is currently the managing principal of AQR Capital Management LLC and previously headed the group that started Goldman Sachs Asset Management ("GSAM") quantitative strategies and its Global Alpha hedge fund.