Sergey Aleynikov

When it is on the receiving end of coure.

'Commingle' hundreds of millions in client funds which are subsequently stolen rehypothecated as collateral by JPMorgan while your firm goes bankrupt as a result of your idiotic prop trading decisions, and what happens? Your toughest choice is whether to vacation in Fiji or St Barths. That said, being former CEO of the world's biggest TBTF hedge fund also known as Goldman, a former governor and senator, and most importantly bundler for the president of the "transparent" administration certainly helps. On the other hand, be a lowly algo trader and quant programmer working at the aforementioned hedge fund, and having dared to "steal" secret trading client code what can "manipulate markets" and what - you get the full wrath and anger of the FBI, the Federal Court System, and now the Supreme Court.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

• World’s Oldest Shipping Company Closes In Industry Slide (Bloomberg)
• Japan Growth May Slow to Half Previous Pace as Exports Wane (Bloomberg)
• China Export Growth Slides As World Recovery Slows (Bloomberg)
• Weidmann tries to muffle not spike Draghi's ECB guns (Reuters)
• Draghi lays out toolkit to save eurozone (FT)
• Concerns grow over prospects for sterling (FT)
• RIM Said To Draw Interest From IBM On Enterprise Services (Bloomberg)
• UN urges US to cut ethanol production (FT)
• Goldman Sachs Leads Split With Obama, As GE Jilts Him Too (Bloomberg)
• New apartments boost US building sector (FT)

• Fed's No. 2 Strongly Backs Low-Rate Policy (Hilsenrath)
• World Bank Cuts China 2012 Growth Outlook on Exports  (Bloomberg)
• BlackRock's Street Shortcut: Big Banks Would Be Bypassed With Bond Platform; 'Not Going to Cannibalize' (WSJ)
• George Soros - Europe’s Future is Not Up to The Bundesbank (FT)
• Fed May Have Aggravated Income Inequality, El-Erian Says(Bloomberg)
• Shirakawa Pledges Japan Easing Amid Political Pressure (Bloomberg)
• Spain’s Debt Struggle Opens Door to Sarkozy Campaign Message (Bloomberg)
• Iran Woos Oil Buyers With Easy Credit (FT)
• Syria Pledges to Observe Ceasefire (FT)

Chicago hedge fund Citadel may not have the best of luck when it comes to running traditional financial businesses (it's recent disastrous foray into advisory and capital markets - nuf said), but when it comes to picking up nickels and dimes ahead of slower traders (yes there is a name for it, but for lack of immediate legal retaliation by an uber-sensitive Ken Griffin we will leave it to our readers' imagination) by virtue of faster computers and a massive collocated infrastructure, Citadel is second to none (well, except maybe now infamous Latour Trading). Which explains why it is so sensitive to any former employees "borrowing" its special sauce, aka the computer code that is the only thing that gives the hedge fund its fro... er, superior trading execution. It was only last year that the fund went all Friend-O on Misha Malyshev, whose Teza technologies was implicated as the future employee of one now legendary Sergey Aleynikov. Well, it is time for a redux. As Dow Jones reports, "a former technology employee of hedge fund manager Ken Griffin's Citadel LLC was arrested for allegedly stealing sensitive computer trade secrets from the company for his own personal use, the Department of Justice said. According to the complaint affidavit, 24-year-old Yihao Pu, also known as "Ben Pu," was found by Citadel's information technology department to have "downloaded several unauthorized programs," which allegedly allowed him to bypass Citadel's security protocols and transfer files or data from his Citadel computer to an external storage device."

The man who singlehandedly almost stole Goldman's algorithm that could "manipulate markets" (p 8, lines 4-7) is now the person with the biggest prison sentence to come out of the entire financial crisis. Sergey Aleynikov has just gotten a 97 month sentence for doing absolutely nothing but copying some Goldman code that would likely never be recreated by anyone. In the meantime the bank execs who should be in jail, are currently benefiting from their coopted Fed to allow them to collect taxpayer-funded dividend payments. Justice may be blind, but not in America, where its eyes have been unfortunately poked out. On the other hand, at least Aleynikov did not get the gas chamber...

Over the years we have not spared our praise for the Nasdaq: the one exchange to first legalize frontrunning aka Flash Trading, to actively promote churning via HFT erection-inducing liquidity rebates in stocks and options, to create novel and ingenious ways to skirt Rule 611, and, most recently, to overtake the NYSE as host for greatest number of fraudulent Chinese reverse-mergers, the Nasdaq has never kept a secret that it cares far more about its clients than the investing public. Yet little did we know that in addition to pervasive manipulation we can also add thorough security breach and compromise to the exchange's list of transgressions. According to the WSJ, "Hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year, and federal investigators are trying to identify the perpetrators and their purpose, according to people familiar with the matter." Now it is sadly ironic that the world's "electronic exchange" (whatever that means in a world devoid of any carbon-based traders) is the one that would succumb to an outside incursion. What, however, is punishable by even the most mentally retarded, transvestite midget porn-obsessed SEC minion, is that US investors have to learn that practically any stock transaction in the recent past may have been frontrun by illegal means (as opposed to just legal ones that are available to any one with a few Mahwah collocated Cisco machines), through a newspaper.

Despite our relatively light coverage on the subject recently, we haven't forgotten that the US stock marketplace is broken beyond what some say, any chance of fixing. Unfortunately, it has become painfully obvious that between the corrupt SEC and CFTC, there will be no proactive regulation, no actual changes to a broken market structure, until the next, and far more serious flash crash takes place, and destroys the last trace of market credibility. In the meantime, looking back at 2010 market developments, aside form the one event that punctuated just how broken the market is, namely the May 6th flash crash, there were other notable events. Below we present Themis Trading's five best market structure themes of 2010.

Score one for the farce team. That scourge to market efficiency, fairness and integrity, Sergey Aleynikov, about whom we have written tomes, has been found guilty. The HFT code in question, that can "manipulate markets" is safe and sound, back with its true master, Goldman Sachs, which firm promises its malicious attempt to squeeze CDS traders in 2007 is completely irrelevant, and the sheeple once again don't understand that the firm's intentions were nothing but pristine.

One of the recurring topics on Zero Hedge since inception has been that Goldman's flow/prop operations, simply by dint of their massive, monopolistic size, allow the firm to manipulate various securities, among which equities, structured products, and especially CDS. And while the firm has migrated to a more wholesale market manipulation paradigm when it comes to equities due to the far smaller bid/ask spreads, requiring the need for Goldman to become either an SLP on the NYSE, or to create market manipulating algorithms, such as that it is currently accusing Sergey Aleynikov of stealing, where the firm has always excelled has been in the far thinner, and far more profitable, courtesy of wide bid/ask margins, CDS market. Today, we get confirmation from Senator Carl Levin, to whom it appears Goldman has the same trophy value as SAC to the New York District Attorney and Federal Task Force, that Goldman was engaged in precisely the kind of CDS manipulation we have previously alleged the company was involved with.

Earlier today, Irving Picard, trustee of the Madoff liquidation trust, filed a lawsuit against JPM, accusing the bank of enabling massive fraud and seeking over $6 billion in fees and damages from Jamie Dimon's bank. As per the press release (full copy below), the reason for the lawsuit is that "JPMC admitted in the months before Madoff’s arrest that BLMIS’s returns were too good – especially in down markets – to be believable, but for years they pretended that was not the case,” while on the banking side, the complaint charges, JPMC should have been more vigilant in seeing illegal cash flows. Instead, “JPMC was willing to ignore decades of suspicious and inexplicable activity." As a result "given that the main BLMIS account was held by JPMC, the bank was in a perfect position to investigate,” Mr. Sheehan said. “It had only to review its internal account records to determine whether there was a legitimate explanation for the cash moving in and out of the BLMIS accounts. And when there ultimately was suspicion of illegal activity, JPMC had a duty to take action. It failed to do so." The release goes on further to indicate that the full complaint has been filed under seal in bankruptcy court, undoubtedly per JPM's demands that its dirty laundry not be exposed, very much the same reason why Goldman is seeking a sealed courtroom hearing during its lawsuit against Sergey Aleynikov. Luckily, ABC has managed to obtain what appears to be a key part of the evidence confirming just how much JP knew. Curiously, we find that it may have been a major redemption by none other than JPM in October of 2008 that set off the avalanche leading to Madoff turning himself in once the ponzi was over.

• Euro-Zone PMI Manufacturing for November 55.3 - lower than expected. Consensus 55.5. Previous 55.5.   
• Hopes of ECB bond buying calm markets (FT)
• Fed Will Name Recipients of $3.3 Trillion in Emergency Aid During Crisis (Bloomberg)
• China goes deeper into price controls: "China, the world’s biggest
  cooking-oil user, has ordered four suppliers including Wilmar
  International Ltd. and Cofco Ltd. not to lift product prices to help
  slow inflation, the National Business Daily said, citing people it
  didn’t identify." (Bloomberg)
• The ongoing saga of Sergey Aleynikov: Goldman challenged on trading code (FT)
• Contagion May Force EU to Expand Arsenal to Fight Debt Crisis (Bloomberg)
• The perilous condition of Portugal's banks (BBC)

Citadel is no stranger to headlines: in late 2008, the firm was a prominent fixture in the news, typically mentioned in the same paragraph as some (now long former) LP who had attempted to redeem capital from Ken Griffin's firm only to hear redemptions were indefinitely, and without warning, halted, followed up by an expletive laden tirade. After all it is only called a hedge fund: in reality it is merely a levered bet that Moody's assumption that nothing can ever go lower, is correct. Well it wasn't, and as a result in 2008 Citadel lost more than half of its assets. The net result is that with profits of 62% in 2009 and 4% YTD, the firm (and, incidentally most other funds) has no chance of hitting its high water mark for a second year in a row.  Which brings us to today's surprising news that Ken Griffin (allegedly perceived in the industry as arrogant beyond comparison, so this must hurt overtime) has finally decided to eat humble pie and to lower its management fee. As hedge fund veterans know too well, this is often the first step of the beginning of the end, as it may indicate either a i) liquidity shortage, ii) a surge in redemptions, iii) a performance that is far worse than officially represented, iv) a megalomaniacal dictator at the head of it all, or  v) all of the above. Most of all, it indicates that very soon every LP in Citadel will demand the same terms, making profitability for the hedge fund turned market market turned investment bank turned FRBNY collaborator into a living hell of razor thin margins. As for the title, it is rhetorical.

Submitted by Themis Trading

Bachus Hensarling Letter to Schapiro, and Our Comments.

This morning we awaken to find the Bachus/Hensarling August 24^th
2010 letter to Mary Schapiro in our inbox, which we include as an
attachment for you to read. Ever since the HFT industry formed their own
lobbying group in Washington DC a few months back, we have expected a
letter like this to surface. We certainly have expected it to surface
given the recent anti-HFT media attention post May 6^th. Please allow us summarize their letter for you. In 2008 markets functioned exceptionally well. High Frequency
Trading is beneficial to all. We all benefit from their liquidity. If it
goes away we will all suffer.  Spreads have never been narrower. Costs
of trading have never been lower. There is no evidence that flash order
types are bad. Don’t make any changes unless you have more data. Turning
back the clock on innovation will do harm. With our bias in mind,
please answer in writing to us by September 10^th, 2010 the following 15 rhetorical questions. Had we told you this letter was written by the HFT lobby, you would
have shrugged while commenting that such drivel is what you would expect
that lobby to say. Perhaps we all should shrug less, and be more
alarmed, that it comes from two congressman up for re-election, and
written on the Committee on Financial Services letterhead. Incidentally,
you can see who contributed to Representative Bachus so far in 2010
here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.