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07 JUL, 2009

Manipulation?
We have talked extensively on our blog and in our white papers about the power of high frequency trading and program
trading. We have noted that these trading strategies can move the market quickly during the trading day. We have always
suspected that there have been certain major players that can dominate this space. Now comes the case of the stolen
proprietary trading code from Goldman Sachs.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axYw_ykTBokE

Most interesting in this Bloomberg article is the following statement by Assisitant U.S, Attorney Joseph Facciponti:

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to
manipulate markets in unfair ways,” Facciponti said

Is this an admission by Goldman Sachs that there is the possibility of manipulation in the market? Does anyone think that
this is the only program in the world that can “manipulate” markets? With all the programmers in the world, we can only
imagine how many more manipulative programs are out there. Now here is the best part according to the assistant U.S.
Attorney:

The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities
markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.

Markets are a zero sum game - somebody wins and somebody loses. Where do you think these “many millions of dollars”
are coming from? They are coming from you - the average retail investor and the large institutional investor. These
programs are taking advantage of real order flow and are siphoning off small profits throughout the day that belong in the
pockets of the retail investor and the traditional money manager.

So, who is out there to protect you from these “machines” and their army of programmers? One would think the SEC has
your back. But what did they have to say about high frequency trading. According to an article in the WSJ (http://
online.wsj.com/article/BT-CO-20090618-707189.html )

The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to
trade against the machines without further regulation.

“We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the
managers themselves to make sure other traders aren’t manipulating their models.

This story is just at the beginning stages and we here at Themis Trading intend to keep a careful watch on it.

This entry was written by jsaluzzi, posted on July 7, 2009 at 8:56 am, filed under Market Commentary. Bookmark the
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One Trackback
1. By Summer reading: Market manipulation and gaming « CIJ Blog on July 7, 2009 at 11:16 am

[...] of Wall Street these days. From bear rallies, to exposés on the likes of Goldman Sachs, to current accusations of
widespread market manipulation. To put it in plain English, there’s more than just a bit of speculation that there are [...]

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