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John Crudele: Did Goldman use HFT to rig markets for the U.S. government?
Goldman Keeps Its 'Flash Boys' Under Wraps
By John Crudele
New York Post
Monday, April 7, 2014
Yep, the stock market is rigged.
I've been explaining this to you for nearly 20 years. But thanks to best-selling author 'Michael Lewis’ intriguing book "Flash Boys," which comes to the same conclusion, a much wider slice of America is talking about it now.
But Lewis' book -- as well-written and riveting as his best-seller "Moneyball" -- touched on only one way the stock market was rigged: through high-frequency trading (HFT).
And the book deals only with how manipulation has been occurring in recent years.
... Dispatch continues below ...
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I can't do justice to the "Flash Boys" storytelling here, but Lewis explains in depth how HFT uses faster computers, better cable lines, and closer access to stock markets to jump in front of regular people's trades.
But to me, the very first line of the introduction of "Flash Boys" is the most intriguing thing in the whole book.
Why do I think that? Because it's a topic I wrote about a number of times in 2009 when a guy named Sergey Aleynikov, who developed high-frequency trading programs, was arrested by the FBI for stealing computer code from his employer, Goldman Sachs.
Lewis writes: "I thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs."
And -- this is the drumroll moment -- Lewis (as I did in my 2009 columns) quotes an FBI agent who said that in the wrong hands, the computer code Aleynikov allegedly stole could be used to "manipulate markets in unfair ways."
"Goldman's were the right hands?" Lewis asked. As Lewis points out, everything the FBI agent knew about high-frequency trading he learned from Goldman.
My question back then, as it is now, is: What was Goldman doing with this code? Why did it react so aggressively to the theft?
And why did the FBI -- which has important stuff like murder and terrorism on its to-do list -- jump into the Aleynikov case within 48 hours of Goldman's complaint when the computer geek's actions really should have been handled in civil court by Goldman's lawyers?
And did Goldman think there was a "fair way" to manipulate markets?
Did Goldman think only it could manipulate markets?
Lewis doesn't get into this, but I think Goldman by 2008 had been using its high-frequency trading program to rig the stock markets. And -- this is the most important part -- it was doing so with the blessing of Uncle Sam, hence the FBI's attentiveness.
That's how Goldman could have made the case that there was a fair way to manipulate the markets. And that's probably what Goldman CEO Lloyd Blankfein meant when he oddly proclaimed in early November 2009 that he (or his company, he wasn't clear) was "doing God's work."
What evidence do I have of this? Back in 2009, I looked through the phone logs of then-Treasury Secretary Hank Paulson, formerly the chief executive of Goldman, and discovered many, many calls between him and Blankfein during the financial crisis.
In a Sept. 29, 2009, column I reported that Paulson spoke almost as frequently with Blankfein during the worst part of the crisis as he did with Federal Reserve Chairman Ben Bernanke. And he hardly spoke to any other Wall Street executives.
In the column, I wrote: "On Wednesday, Sept. 17, 2008 ... the stock market performed horribly. By the end of the session, the Dow Jones industrial average tumbled 449 points as investors worried about the nation’s financial system.
"The next morning, Sept. 18, Paulson placed his first call of the day at 6:55 a.m. to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It's unclear whether the two connected because Blankfein called Paulson minutes later.
"And then Blankfein placed another call to Paulson at 7:05 a.m. for what looks like a 10-minute conversation.
By 9 a.m., 30 minutes before the markets opened, the two had connected or tried to connect three times.
On Sept. 17 -- the day the market was collapsing -- there were five calls between the pair. It would have been extremely odd if Paulson and Blankfein hadn't talked about wanting to see market strengthen during those three calls early Sept. 18 morning.
But the market didn't open strong on Sept. 18.
Stock prices did, however, begin a miraculous recovery around 1 p.m. that day.
By then rumors were starting to spread about a government bailout of banks, and the market turned on a dime.
Market rigging? Probably, done in a number of ways -- through leaked information and heavy trading through HFT. Wall Street pals who could have purposely changed the momentum of the market.
Was the computer code that Sergey Aleynikov was accused of stealing used during that day's trading? Is that why Goldman knew the code could manipulate markets? Is that why the FBI responded so quickly? I don't have answers, but those are all legitimate questions.
Tim Geithner, who was head of the New York Federal Reserve Bank at this time (and later became treasury secretary) was quoted later in an interview that Washington "was forced to do extraordinary things and, frankly, offensive things to help save the economy."
Was rigging the stock market one of them?
John Crudele is business columnist for the New York Post.
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