Global articles on espionage, spying, bugs, and other interesting topics.

Goldman ‘spy’ trial tests trade-secret limits

The criminal case of the alleged Goldman spy is off and running, and it’s shaping up to be a good one. The case seems likely to open a window into the mysterious world of high-frequency trading and to shed some light inside Wall Street’s most notorious powerhouse, Goldman Sachs. But the lawsuit might do something else, too: It could test legal limits related to trade secrets — and cause angst far from the trading world.

The man of the hour is the defendant, Sergey Aleynikov. Aleynikov was a programmer in Goldman’s high-frequency trading group and is accused of taking code in order to help a new employer compete with Goldman. He disputes this and has said he intended to take some code, but not anything secret – just open-source code. The open-source part of that is crucial.

When open-source code is involved, what can be defended as a trade secret? His argument is “going to make it harder for government to prove that what was taken was in fact proprietary to Goldman,” says Brent Cossrow of the Employee Defection and Trade Secrets Practice Group of law firm Fisher Phillips. That could roil the high-frequency trading world, a competitive and controversial business that is transforming the financial markets. Beyond that, any company that has open-source software sitting on its networks, integrated into its digital intellectual property, might have to circle the wagons and figure out what to do.

High-frequency trading relies on algorithms that exploit tiny price differences in the markets. Do that enough, fast enough, and it can lead to big profits. Algorithms that do best have essentially found a niche in the market, and their owners are secretive because they don’t want anyone else muscling in on their niche. The algorithm is the secret sauce.

Goldman purchased its original code in 1999 from Hull Trading, founded by Chicago trader Blair Hull, for $531 million. After that, Goldman presumably had the right to do what it wanted with the code. It could add to it, take away from it, and tinker with it at will. It brought on programmers to do that, including Aleynikov. Programmers are vital in this space, and they’re demanding high pay. After UBS reportedly came calling for Aleynikov, Goldman paid Aleynikov $400,000 a year.

But when programmers write new code to insert into existing code, that can take hours. So sometimes, instead, they use open-source alternatives available for free on the internet. Open-source software is meant to be shared. It’s used in many industries, but Wall Street’s programmers find it particularly useful. In trading, time is money, so speed is prized.

In this case, proprietary and open-source code come head to head. Around the time Aleynikov planned to take a new job, he uploaded some code. Goldman says he stole proprietary code that it and the government claims is a trade secret. But Aleynikov says that he only meant to take open source code, which by definition isn’t secret.

Cossrow says this argument raises several questions. How much of what Aleynikov downloaded was open source? How much of it was proprietary? Those questions are possible to answer — it requires looking at the code and at the metadata (data about data) underlying it. That could mean laying bare Goldman’s code, which would be something between a headache and nightmare for Goldman. The government wants the courtroom closed if that happens.

But there are more questions: as there are hundreds of open-source licenses, what were the terms of the open-source license or licenses associated with the code Aleynikov is accused of taking? And how did Aleynikov use the code in the broader software?

All that leads to the ultimate question: how much open source code, and of what quality, does it take to dilute a trade secret? As Cossrow explains, “if you bake the world’s best brownie, and the recipe is secret, the mere fact that you used water as an ingredient doesn’t mean the whole recipe is diluted.” However the courts haven’t gotten much more specific than that.

For lawyers like Cossrow, this case is turning into a big deal. There’s no telling where this argument could take Aleynikov, but if it works, it could turn out that Goldman’s alleged trade secrets aren’t really secret at all. That could blow up Goldman’s trading profits. It’s all very interesting stuff — and that was just the first day of trial.