Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Misha Malyshev

Misha Malysev and Teza Technologies Sued By Citadel Investment Group

On July 9th 2009, another legal shoe dropped in the case of Sergey Aleynikov and his would be new employer Teza Technologies. Ken Griffin's Citadel Investment Group is now suing its former head of high-frequency trading Misha Malysev and two other former employees, Jace Kohlmeier and Matthew Hinerfeld, alleging that their formation of a new trading firm violated a non-compete agreement they had with Citadel.

As The Wall Street Journal reports, "The identity of Malyshev's new firm, Teza Technologies LLC, became very public this week, when it said it hired and subsequently suspended former Goldman Sachs computer programmer Sergey Aleynikov. Aleynikov has been charged by the U.S. with stealing computer code from Goldman's high-frequency trading business. Aleynikov and his lawyer have asserted that any violation was unintentional, and that he didn't distribute any codes obtained from Goldman."

The Citadel complaint was filed in the Chancery Division of Cook County, Illinois Circuit Court. The complaint asks the court for an expedited hearing in the case, saying that Teza could cause "irreparable" harm to Citadel. It also mentions the Aleynikov affair, stating, "Teza's decision to hire Aleynikov, an accused software thief, creates a substantial risk that they have stolen, or may be planning to steal, Citadel's proprietary code."

As part of the complaint, Citadel attached copies of the non-compete agreements and resignation acceptance letters of the former employees. Malyshev's agreement states that for nine months following his February 2009 departure, he cannot start working for a "competitive enterprise" or use "quantitative analytics which are based on information that is proprietary to Citadel and which I either utilized or developed when I was employed by Citadel." The WSJ notes that Citadel's non-compete agreements are widely considered to be among the more stringent in the hedge-fund business.

Sergey Aleynikov Charged With Stealing Goldman Sachs' Algo Trading Source Code

On Monday July 6th 2009, various news outlets are reporting on the rather brazen bank theft by one Sergey Aleynikov. Rather than brandishing a gun or cracking a vault, Sergey hacked the algorithmic trading secrets of his then-employer Goldman Sachs by downloading proprietary, "black box" computer models that Goldman uses to execute rapid-fire trades in the financial markets. The value of this intellectual property, experts say, could be incalculable.

Toomre Capital Markets LLC ("TCM") has written extensively about the topic of Algorithmic Trading. Interested readers, for instance, might want to review the white paper entitled Market Risk and Algorithmic Trading that TCM wrote on behalf of Advanced Micro Devices some months ago. As that paper starts,

In the evolving financial markets, ever-more complex quantitative analyses are performed. Some constantly assess the market risk of portfolio exposures, while others calculate the probability of reward for various strategies in the continually shifting markets.

Increasingly, algorithmic trading programs automatically execute the trade orders that result. With the growing adoption of the AMD Opteron™ processor, high performance computing for quantitative modeling and algorithmic trading in the financial markets likely will increase.

Simulation modeling techniques quantify market risk, measuring the probability and magnitude of potential loss due to change in prices. As market liquidity decreases, typically price volatility and, hence, market risk increases. With the recent introduction of decimalization, the U.S. equity market structure dramatically changed. Trading spreads shrunk, trading venues proliferated, and market liquidity fractured. As a result, a new form of trade execution emerged: algorithmic trading.