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Thursday, July 23, 2009

CNBC spikes story on Goldman Sachs

To follow up on allegations that Goldman Sachs deployed High Frequency Trading ("quant flushing") software, I admit I was wrong about the story going no farther in the corporate media. The blogger who brought up the original story so irritated one of its editors, Charlie Gasparino, as to stir a personal response.

About 1:30 EST on Wednesday, CNBC's on-air editor Gasparino, explained that he'd been bombarded with e-mails from a "zero something" blogger who'd claimed that he'd given Goldman Sachs preferential treatment.

Gasparino appear to be somewhat defensive, explaining that he'd spent "90 percent" of his reporting critical of the financial behemoth and that any allegation of favorable treatment was patently false. But it didn't end there, nor did Gasparino even admit the real source of contention with the blogger "zero-whatever."

At the urging of CNBC's big-breasted Caruso-Cabrera, Gasparino began to rail on about how some bloggers were so stupid, hiding behind their anonymity, more or less a full blown' attack not only on ZeroHedge, but the credibility of the whole blogging community.

Rather than cover the real story--Goldman's uncanny ability to make money while its competitor's languished--CNBC anchor Michelle Caruso-Cabrera launched into a mini-campaign of defamation of bloggers, assailing their credibility. For the wise, this kind of attack readily appears to be what it truly is, the attempted destruction of a story dangerous for Goldman Sachs and the credibility of the mass media.

Reporters and anchors at CNBC apparently see no fault in making themselves the news story- a big no-no in journalism. One CNBC reporter, Rick Santelli, just a few months back actually got in a war of words with the White House about the bailout, as he editorialized about the injustice of bailing out defaulting mortgage-holders.

However strongly Tyler Durden, ZeroHedge's anonymous author, comes on, it's the duty of an objective press to bring to the public's attention a story of this magnitude. If the mainstream media can't or won't cover a story, it falls on bloggers to call it to attention. I discovered the story myself through a blog post by vets74 on DailyKos, ""Incredibly Shrinking Liquidity as Goldman Flushed Quant Trading."

That article dated from July 7th, giving an indicator of just how delayed the mainstream is in covering timely stories. For example, the New York Times held back on the NSA surveillance story for an entire year. There's not being in a hurry, then there's just plain sitting on a story 'til it dies. In the meantime I'd heard all kinds of explanations for the size of Goldman's profits, not a one of course explaining the company's use of High Frequency Trading software nor its fugitive executive, Sergei Aleynikov.

The New York Times did provide a nibble on the quant flushing game in an Op-Ed by Michael Osinki last week, on Friday, titled "Steal This Code." The article largely downplays Aleynikov's theft of the proprietary trading software. Osinki does express his surprise at the scale of the FBI's reaction.

Presented not as a news item but simple opinion, the op-ed doesn't mention the possibility that a large portion of GS' huge profit may have come from quantitative trading, software programs that conduct high-frequency automated transactions a millisecond before they're executed on the exchange. Nor is any mention made of the threat that exposing HFT trading on such a vast scale posed to Goldman, or the credibility of US-based exchanges.

When a broker does this, it's called front-running. Several mutual fund companies were penalized for front-running their own customer's order back in 2003, and paid over a billion dollars in fines (versus restitution.) Because the proprietary software Goldman was digital, it likely didn't meet the outdated definition of front-running.

What HFT might lose in terms of its profit-by-order, it makes up for with volume. Some 70% of the trading volume of the major exchanges now comes through these high frequency trading programs.

High frequency trading (HFT) appears to be the domain of the largest players in the market players.

The former Goldman Sachs executive, Sergei Aleynikov, who stole the software was attempting to start his own firm in Europe when arrested by the FBI.
I suggested in my previous comment on this point that the FBI's role in what should be a simple case might indicate that the software might have been sold to the highest bidder, possibly even a strategic rival like Russia who could use the systems to profit as well. I can just see the thriller, like "Assassins" with Julianne Moore as a hot geek peddling stolen software.

In the tight star chamber shared by New York financial and media elite, Goldman has a reputation to preserve. Reticent indeed would any major media outlet be to suggest Goldman had cheated. Offering illicit quantitative software in the open market challenges the broadly sold myth that Goldman is special, or so much better managed that the normal rules need not apply. The potential PR damage is immense; stifling it the duty of any promotion-minded mid-level media employee.

While other firms appear to execute HFT, it takes real clout and a trusted place on the inner circle of the financial elite to turn massive profits out of HFT. Clearly, Goldman's software offers key advantages. Still. it's the insider access that allows the firm to tap in to the web traffic, analyze it, and determine the most likely transaction that will transpire based on the message's size, destination, and past patterns--aggregate--behaviors. All within milliseconds.

The process depends on speed. Transactions occur just fast enough to execute the "quant flush" trades before the real orders are executed.

The better the connection to the server, the more quickly orders can be executed. An order originating on the periphery of the vast electronic trading network might take several seconds to bounce between servers. That data traffic can be read and its destination determined, providing the data miners along the web route sufficient opportunity to exploit the trade that will unwind at the exchange a scant few seconds later.

Exploiting the web architecture for gain is nothing new; what has changed is the sheer scale of the operation and its profits. Regulators don't stand a chance, unless of course they are given full access to Goldman's data resources, an unlikely event considering the massive influence it has over Washington and Congress.

For those who are only now waking up to this important story, you can see the original post here, (with limited commercial interruption or top-heavy hosts spouting off in defense of hypercapitalism):

Bloomberg also appears somewhat concerned when a company that took billions in government funds ends up making a vast profit just a quarter later. Unlike the people at CNBC, I'm guessing Bloomberg figured out that there is something to the allegations, and actually reported on it. See the post by Edward Harrison of Credit Writedowns here.

Now if Bloomberg were more like CNBC, I guess we'd see the credibility of the blogger attacked and the real issue--how much GS is making with its High Frequency Trading--ignored. To make matter worse, dissing the blogs is in itself evidence of how out-of-touch that entity, a subsidiary of GE, has become.

Blogs are a major source of information for anyone in the financial industry. Look no further than CNBC's own "bloggingstocks.com" blog. I guess some in the corporate media see bloggers as a threat.

Deriding the bloggers as CNBC anchors are prone to do might be a sign of progress, a tacit admission that the blogs are really making an impact. The impact on Charlie Gasparino reflects a blogger community and Americans beyond the centers of media control who are very eager to hold television personalities to account for the truth, or the absence of it they provide.

Mass media will of course look to diminsh the relevance of bloggers any way they can. Challenging the media status quo is a heatlhy exercise, and should probably evoke derision. Gandhi said they--meaning the British in his quest for Indian independence--would first ignore you, than laugh at you, then start to fight you. The fact that the concerns of an anonymous Tyler Durden made it all the way to the mass media proves that dedication and persistance can pay off, evenif the reward comes dressed as a package of on-air mockery.

Sooner or later the media moguls in control of their corporate news divisions will feel the heat of huge chunks of their audience lost to the Internet. Still, I've never said that the mass media model should be abandoned, just that the idea of relying on TV news exclusively in like so twentieth century, reflects an adolescent, condescending attitude with which TV personalities view their audiences, as passive, unthinking sheep who cling on their every word. How dare they make the unfiltered truth known to millions through their blogs, they must be thinking.

Big egos are common in that industry, just as the trend towards "conservatism" in reporting has accelerated to the point commentators on CNBC like Larry Kudlow constantly frame the good approach to business as anti-regulatory, and regulatory efforts as "anti-business."

This highly politicized worldview has led to an utter lack of objectivity in covering the news, and worse, deluded Americans into thinking deregulation is actually good for business. Nowhere has this been made clear than by the financial credit implosion, an event that is continuing to unfold, one that will likely bear lasting effects for years to come.

Notice how little of the mass media's coverage has been concerned with regulatory lapses that led to the risky behaviors by major financial firms who were supposed to have been regulated. We all know enforcement drastically eroded under Bush, as industry representatives assumed control of numerous agencies throughout the federal government, overseeing industries on whose behalf they'd previously lobbied.

Are these mass media people so stupid as to assume Americans can't tie de-regulation and the financial collapse together? And what of the credibility of entities like CNBC-can people truly say that their interests and risks to their financial futures will be brought up for honest and objective analysis by the mass media? No.

The purpose of the corporate media has been to follow the corporate interest, not the public's. Those working in the financial news media clearly work for their advertisers, who first and foremost want to avoid any negative publicity.

The death of investigative journalism has come largely because these corporate conglomerates don't want to risk alienating potential advertisers with exposes and other damaging information made public. So instead we're to blithely assume we can learn all we need to know from the mass media, and can trust them. Ridiculous. And the recent collapse of equity and mortgage markets proves that the corporate media will do very little to protect the interest of the public, or keep people informed.

See this article by Thom Hartman for a great take on why Republican media moguls seems so disinterested in profits, which are the holy grail of the hyper-capitalist system they worship. I've blogged on this inconsistency in the past, pointing out that the media has not only been overly consolidated, it's become unprofitable, even with the myriad interconnections between news divisions and marketing divisions hocking celebrity tell-all's and other crap, which are presented as "interviews" for marketing reasons only. The quality of content declines, suiting a dumbed-down audience that doesn't question what it sees on TV.

On the surface, lost profits seem to be a conflict of interest. But the ugly truth is that right wing media moguls have consolidated their industry to the point they now offer Right-leaning perspective on what they call the news, turning media outlets into distribution engines in a massive propaganda effort to keep Americans ignorant and in the dark, where they can be more easily manipulated. Hitler's propaganda minister Goebbels would have been pleased with the extent to which corporations control media. Like Mussolini, he might have been surprised by how American fascism, if it ever took root, would be far superior to his Italian variety, based on the gullibility of Americans.

The present day consolidated, watered-down corporate news seeks screen out news that might contradict key myths, which include at their forefront the idea that radical islamic terrorists were able to bring down the towers through their efforts alone, with no aid from any other government.

The 9/11 Truth movement is a vital part of the Web experience because it challenges assumptions made by the government in its Official Explanation long before the molten metal in the basement of the Towers had cooled--all from a bunch of kerosene, really?

Hitler didn't have to contend with the Internet; accurate news provided by bloggers would have dispelled numerous propaganda, and could have more quickly consolidated opposition to the Holocaust and other unsavory practices.

Now as is the case in modern-day Australia, Hitler and his goons could simply blacklist websites. Except instead of targeting websites thought to contain child pornography, in Australia's case, a despotic regime would simply blacklist any sites that threaten the regime's version of the truth. And unlike Australians who happen to link to blacklisted sites--and face a large fine--a more autocratic machine could simply disappear the authors.

Now of course there are some issues with using blogs as the only source of news, an idea that just isn't plausible for any serious consumer of news, or anyone concerned with the threats posed by unregulated capitalism on the value of their homes, or retirement accounts.

Anonymous blogging can be a source of libel and unfounded obligations, and thereby unjustly attack individuals. I don't favor hiding behind anonymity-I've extending my name fully here, on some highly confidential issues myself, and have imperiled myself professionally for years to come. Still, like whistleblowers, there's a role for certain anonymous bloggers to play, particularly in sensitive industries or concerning complex topics when an insider's knowledge is essential. One good example might be accountant rules, or graft in contracting, where the anonymous source could face drastic consequences for informing. At the very least, running off about Goldman's HFT schemes is probably a great way for a financial professional to get in trouble.

Despite his anonymity, Tyler Durden is taking risks that the CNBC people won't. Fearless journalism died on that network, at least on that corporate network. Maybe the Durden identity, created in the movie Fight Club, isn't that bad a name for ZeroHedge's author after all. Durden is clearly anti-establishment and CNBC clearly stands on Goldman's side in dodging the accusations.

-Gasparino's profile: http://www.cnbc.com/id/15838145
-Michelle Caruso-Cabrera profile: http://www.cnbc.com/id/15838214

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  • At 3:53 PM, Blogger John M said…

    Hi JB,

    As a fellow real-name guy in this space, I'm going to make free with some criticism. I believe you've got the Aleynikov affair pretty garbled. Furthermore, your Godwin's Rule moment probably wasn't helpful, nor was that crack about Ms Caruso-Cabrera.

    I appreciate your efforts, as surprisingly few bloggers are presently attacking this issue. You might like to shorten your swing on this one, though, there's lots of good stuff to present without going overboard (I have been going overboard, but hopefully it's obvious when I'm doing satire).

  • At 8:42 PM, Blogger jbpeebles said…

    I'm amazed at how far this story has gone: straight to the front page of the New York Times! Judging by similarities in the content matter, I could have written the article myself--72 hours before they did. See the link from Friday, July 23rd here.

    Now of course very little of this can be attributed to my coverage. Nonetheless, I'm pleased to have voiced my opinions on this topic, including my post at smirking chimp (see main page, right side, click the hyperlink on "articles".)

    CNBC's criticism of ZeroHedge may have really helped this story along, which is what the network may have been intentionally trying to do.

    Rather than fixate on my channels alone, I did find out that the people over at TheStreet were agitated on the HFT issue as well. No one blog may have been able to push this topic; together the blogging community is developing as a powerful force.

    Blogs have a vital role in holding the press to account. By channeling--and re-channeling if need be--the message can be sent. At some point the corporate media will have to play more than passing lip service to the facts, especially if they stand out prominently in the blogs, which can and do shape coverage.

    John M, I couldn't help but say that crack about her boobs. I guess it's not so much that she has them, but it's the casual yet provocative way she always seems to thrust them out.

    Either that or it's because I'm a guy and she's kinda hot.


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