By Pam Martens: April 22, 2014
There is now overwhelming evidence that Wall Street firms have entered a race to the bottom in high-tech trading wars. To grab the best programming talent, Wall Street firms are paying top dollar for the best and brightest coders and developers and potentially sapping the ability of other U.S. industries – those that make real products – to compete.
Just this month, Jamie Dimon, CEO of JPMorgan, told the firm’s shareholders in his annual letter that JPMorgan employs “nearly 30,000 programmers, application developers and information technology employees who keep our 7,200 applications, 32 data centers, 58,000 servers, 300,000 desk-tops and global network operating smoothly for all our clients.”
According to Anish Bhimani, Chief Information Risk Officer at JPMorgan Chase, in an interview published at the Information Networking Institute (INI) at Carnegie Mellon, JPMorgan has “more software developers than Google, and more technologists than Microsoft…we get to build things at scale that have never been done before.”
Obviously, not all of those tech guys are engaged in creating ever more rapid trading strategies; but to stay competitive with the technology arms race on Wall Street, new algorithms, programs deploying artificial intelligence, and high-speed routing techniques are being created at break-neck speed across the industry.
Industry insiders say that Wall Street is a potent force in campus recruiting, seeking out the computer whiz kids with large pay deals months before their graduation and before non-financial firms have had a chance to even schedule an interview.
An online advertisement at efinancialcareers says that “The market for intelligent and sophisticated programmers within finance is still booming, and not just for those with existing finance experience. The world’s top financial institutions are continuing to search for the most talented technologists from an array of backgrounds…” Salaries are listed at $150,000 to $400,000 for programmers skilled in C, C++, Core Java, Low Latency, Multithreading, FX [Foreign Exchange], Equities, Futures, Perl, Python, TCP/IP, High Frequency, Bank, C#, Operations, Python, Unix, Linux.
As all of this has been accelerating over the past two years, the Securities and Exchange Commission has assumed the role of the absent-minded professor, studying academic papers on the subject and, when they get around to it, publishing their findings as to what other people are saying. A recent paper published in March at the SEC said “The staff’s hope is that this literature review will help promote a dynamic exchange with and among the public, including investors, academics, securities industry participants, and others on the topic of HFT [High Frequency Trading].”
Under the Securities Exchange Act of 1934, the SEC is handed the mandate to regulate the Nation’s stock exchanges and safeguard them from manipulators and market rigging. Its statutory role is that of watchdog and enforcer. But when it comes to high frequency trading, it has shown little bark and no bite.
Congressional hearings on the matter have been equally missing in action. It’s now been three weeks since bestselling author, Michael Lewis, dropped his public bombshell on 60 Minutes, explaining in terms the lay person can understand how woefully rigged the U.S. stock markets have become, and yet a quick check this morning at the hearing schedules for the U.S. Senate and House committees that would be most likely to conduct these investigations show no such scheduled hearings.
If Congress does finally get around to the hearings before another Flash Crash, one witness the public will want to hear from is the expert coder, Sergey Aleynikov. Aleynikov was working for Goldman Sachs when he received an offer to move to a hedge fund and build a system from scratch with compensation topping a cool $1 million. Aleynikov accepted the offer but agreed to stay at Goldman for six weeks training his colleagues. Certainly a show of good faith.
That was 2009. For the past four years, Aleynikov has been arrested and jailed by the Feds, had his conviction overturned by the Second Circuit Appeals Court, rearrested by the Manhattan District Attorney Cyrus Vance, and now faces more prosecution over the same set of facts: namely, that he took computer code that belonged to Goldman Sachs. This relentless prosecution of Aleynikov, who is said to be among the best coders in the industry, has more than a few Wall Street watchers questioning if this is Wall Street’s latest innovation in non-compete agreements: keep the lad tied up with courts and lawyers until technology innovation passes him by.
When the Second Circuit Appeals Court handed down its opinion of the case in December 2010, it found that Aleynikov had neither taken a tangible good from Goldman nor had he stolen a product involved in interstate commerce – noting that at oral argument the government “was unable to identify a single product that affects interstate commerce.”
That’s pretty much what a lot of financiers and economists are thinking these days: that there is no economic benefit to the country from high frequency trading other than to those doing the looting.
According to Goldman’s web site, it currently allows “clients to access a range of displayed and non-displayed liquidity sources, use our various smart router order types, and/or choose one of our many algorithmic strategies. In determining where or when to place an electronic order, best execution is paramount. We continuously strive to improve our order routing logic through ongoing research of execution performance and market structure, and regularly modify the smart router and algorithms in response to the continuously changing market micro structure.”
When a firm like Goldman Sachs feels confident to brag openly about its lit and non-lit (dark pool) markets and exotic order types (Scott Patterson detailed these exotic order types in his 2012 book, “Dark Pools,” as a form of market rigging) we know that Congress, the SEC and the U.S. financial markets have, once again, lost their way.