The Cold War in high-frequency trading seems to have escalated overnight.
July 9 (Bloomberg) — Citadel Investment Group LLC, the $12 billion hedge fund firm founded by Ken Griffin, sued three former executives and the firm they started, Teza Technologies LLC, over claims they violated non-competition agreements.
“This is a case of industrial espionage,” Citadel said in a complaint filed today in Illinois state court in Chicago. The firm seeks a court order barring the individual defendants from conducting any business through Teza or related entities that compete with Citadel, for the duration of the agreements. …
That’s the Teza LLC where Sergei Aleynikov was due to start work — right before he was arrested for allegedly stealing 32MB of Goldman’s proprietary HFT code — a fact seemingly not lost on Citadel’s lawyers. They’re claiming that Aleynikov was due to receive a salary of $1.2m a year from Teza, and that the programmer’s alleged theft increases the possibility that Teza could be planning to steal Citadel’s own proprietary info. From Bloomberg again:
“Defendants’ activities, particularly Teza’s decision to hire Aleynikov, an accused software thief, create a substantial risk that they have stolen, or may be planning to steal, Citadel’s proprietary code,” the fund manager said in its complaint.
“It had nothing to do with us,” [Teza Attorney Chris] Gair said of the Aleynikov case. He also said he had “no idea” whether the salary figure cited by Citadel was accurate.
Chicago-based Teza, named after a river in western Russia, was co-founded by Misha Malyshev, Citadel’s former HFT head. Citadel is one of the top-players in HFT, claiming to account for up to 10 per cent of global equity volumes in a single day, according to a presentation on the technique made by the fund.
For their part, the Teza execs say they didn’t violate any non-compete agreements and are as yet a “formative” firm that haven’t begun trading or investing.
At the same time as the HFT feud intensifies, a few more details are emerging on just what Aleynikov claims to have done with the code:
July 10 (Bloomberg) — 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.”
Aleynikov, 39, told the agent around 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.
Xp-dev.com is registered to London resident Roopinder Singh, who describes himself on a blog linked to the site as a trading systems developer working in London’s financial services industry. The site offers “subversion hosting,” letting users track current and previous versions of programming code and other documents.
Singh himself has commented on a notice posted on the XP-Dev.com site on Thursday:
. . . At around 9pm BST, I get a call from the “local authorities” (I can’t say who they are right now, but rest assured that they are valid local UK authorities that have jurisdiction in UK) saying that they wanted to visit me at home to discuss XP-Dev.com. I just blew my mind at this point — what in the world happened on XP-Dev.com to make these guys visit me at home ?
It turns out that some idiotic moron a user had uploaded data on to the service that he/she was not authorised to have. This is your basic intellectual property theft case that we’re talking about here. The local authorities had to take all the server hard drives for examination, and I was told that someone will be in contact with me the following day (i.e. 7th July 2009).
The following day, I was on the phone trying to get them to speed things up, but to no avail. Apparently everyone was trying their very best. Later in the day, I did get a call that mentioned that the hard disks will only be returned to the data center the following day (i.e. today).
This morning at around 9am BST, the local authorities visited me at home. We got everything sorted out and the service was brought online at around 12noon BST. The main issue here is that this case of IP theft is an ongoing investigation, and I really couldn’t tell you guys anything at all. In fact this whole blog post is the only amount of information I can let out even at this point. . . .
According to Aleynikov, the code sent to Singh’s server, based in Germany, hasn’t been shared with anyone or any corporation.
As for how the deed was done, Aleynikov claims to have created a tarball - a Unix aggregate of a number of files (like a .zip file) - on June 5 to transfer some open source stuff on the Goldman server to the XP-Dev.com server. He says he encrypted the files, then erased the encryption software, the tarball and the bash history — which is basically a back up of the Unix commands used to amalgamate and transfer the files. Goldman’s security server, however, apparently prevents or at least alerts the company to bash deletions, which appears to be how Goldman found out about the alleged theft.
From Bloomberg again:
Aleynikov said in his statement that he downloaded the Goldman software to his home computer, his laptop computer and his thumb drive.
“The reason I uploaded to svn.xp-dev.com was because it was not blocked by Goldman Sachs security policy,” Aleynikov wrote. The phrase, “not blocked by Goldman Sachs security policy,” was crossed out and he added: “I wanted to inspect the work later in a more usable environment.”
Aleynikov said that he later opened the files to inspect them.
“At that point I realized that I downloaded more files than I intended,” he said.
Whoops.
In any case, Mr Aleynikov’s actions have sparked a major controversy in HFT.
As Robert Iati, Partner at financial research firm Tabb Group puts it:
There’s no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen — and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front run or trade against it, ruining even the most well-planned tactics. This news story contains many very important sub-plots: trading espionage, the necessity for a trading firm to have sophisticated security systems built around its technology, the requirements for risk management, and even the potential for proprietary trading software to be targeted on a wider scale for terrorist activity; but more than anything else it highlights the critical role played by high frequency prop trading in this new market.
A point made even more relevant by the recent spate of cyber attacks on US and South Korean websites.
Related links:
The real story of trading software espionage - Tabb Group, in The Long Room
The Cold War in high frequency trading - FT Alphaville
Who is Serge Aleynikov? - FT Alphaville
