The Spider and the Fly

Published on Rajiv Sethi, by blog owner, August 03, 2013. http://rajivsethi.blogspot.ch/2013/08/the-spider-and-fly.html
Michael Lewis has written a riveting report on the trial, incarceration, release, and re-arrest of Sergey Aleynikov, once a star programmer at Goldman Sachs. It’s a tale of a corporation coming down with all its might on a former employee who, when all is said an done, damaged the company only by deciding to take his prodigious talents elsewhere.
As is always the case with Lewis, the narrative is brightly lit while the economic insights lie half-concealed in the penumbra of his prose. In this case he manages to shed light on the enormous divergence between the private and social costs of high frequency trading, as well as the madness of an intellectual property regime in which open-source code routinely finds its way into products that are then walled off from the public domain, violating the spirit if not the letter of the original open licenses.
Aleynikov was hired by Goldman to help improve its relatively weak position in what is rather euphemistically called the market-making business. In principle, this is the business of offering quotes on both sides of an asset market in order that investors wishing to buy or sell will find willing counterparties. It was once a protected oligopoly in which specialists and dealers made money on substantial spreads between bid and ask prices, in return for which they provided some measure of price continuity.
But these spreads have vanished over the past decade or so as the original market makers have been displaced by firms using algorithms to implement trading strategies that rely on rapid responses to incoming market data. The strategies are characterized by extremely short holding periods, limited intraday directional exposure, and very high volume. A key point in the transition was the adoption in 2007 of Regulation NMS (National Market System), which required that orders be routed to the exchange offering the best available price … //
… Vigorous innovation in open source development continues under the current system, but relies on a willingness to give back on the part of those who benefit from it, even if they are not legally mandated to do so. Aleynikov’s natural instincts to reciprocate were blocked by his employer for reasons that are easy to understand but very difficult to sympathize with.
Lewis concludes his piece by reflecting on Goldman’s motives:

Published on Rajiv Sethi, by blog owner, August 03, 2013.

Michael Lewis has written a riveting report on the trial, incarceration, release, and re-arrest of Sergey Aleynikov, once a star programmer at Goldman Sachs. It’s a tale of a corporation coming down with all its might on a former employee who, when all is said an done, damaged the company only by deciding to take his prodigious talents elsewhere.  

As is always the case with Lewis, the narrative is brightly lit while the economic insights lie half-concealed in the penumbra of his prose. In this case he manages to shed light on the enormous divergence between the private and social costs of high frequency trading, as well as the madness of an intellectual property regime in which open-source code routinely finds its way into products that are then walled off from the public domain, violating the spirit if not the letter of the original open licenses.

Aleynikov was hired by Goldman to help improve its relatively weak position in what is rather euphemistically called the market-making business. In principle, this is the business of offering quotes on both sides of an asset market in order that investors wishing to buy or sell will find willing counterparties. It was once a protected oligopoly in which specialists and dealers made money on substantial spreads between bid and ask prices, in return for which they provided some measure of price continuity.

But these spreads have vanished over the past decade or so as the original market makers have been displaced by firms using algorithms to implement trading strategies that rely on rapid responses to incoming market data. The strategies are characterized by extremely short holding periods, limited intraday directional exposure, and very high volume. A key point in the transition was the adoption in 2007 of Regulation NMS (National Market System), which required that orders be routed to the exchange offering the best available price … //

… Vigorous innovation in open source development continues under the current system, but relies on a willingness to give back on the part of those who benefit from it, even if they are not legally mandated to do so. Aleynikov’s natural instincts to reciprocate were blocked by his employer for reasons that are easy to understand but very difficult to sympathize with.

Lewis concludes his piece by reflecting on Goldman’s motives:

–The real mystery, to the insiders, wasn’t why Serge had done what he had done. It was why Goldman Sachs had done what it had done. Why on earth call the F.B.I.? Why coach your employees to say what they need to say on a witness stand to maximize the possibility of sending him to prison? Why exploit the ignorance of both the general public and the legal system about complex financial matters to punish this one little guy? Why must the spider always eat the fly?

The answer to this, I think, is contained in the company’s response to Lewis, which is now appended to the article. The statement is impersonal, stern, vague and legalistic. It quotes an appeals court that overturned the verdict in a manner that suggests support for Goldman’s position. Like the actions of the proverbial spider, it’s a reflex, unconstrained by reflection or self-examination. Even if the management’s primary fiduciary duty is to protect the interests of shareholders, this really does seem like a very shortsighted way to proceed.

(full text).

Links:

Unhealthy Obsession: Why Italy’s Destiny Is Tied to Berlusconi, on Spiegel Online International, a commentary by Fabian Reinbold, August 02, 2013: Silvio Berlusconi has been holding Italian politics hostage for 20 years. Now that the country’s highest court has upheld his tax fraud conviction, it is surely time he left the political stage. But he probably won’t, because Italy is hooked on the ‘Silvio show’ …;

German Politics: related articles, background features and opinions about this topic, on Spiegel Online International, a commentary by Fabian Reinbold, August 02, 2013.

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