Goldman v. Aleynikov

Michael Lewis on the Aleynikov-Goldman HFT matter. The article mentions that Goldman trailed other players like Citadel when Aleynikov was hired. The head of HFT at Citadel was (I believe) a contemporary of mine in grad school at Berkeley, who did his dissertation in string theory. Malyshev, the guy who hired Aleynikov from Goldman, had his own legal problems when he left Citadel.

Vanity Fair: ... Serge knew nothing about Wall Street. The headhunter sent him a bunch of books about writing software on Wall Street, plus a primer on how to make it through a Wall Street job interview, and told him he could make a lot more than the $220,000 a year he was making at the telecom. Serge felt flattered, and liked the headhunter, but he read the books and decided Wall Street wasn’t for him. He enjoyed the technical challenges at the giant telecom and didn’t really feel the need to earn more money. A year later the headhunter called him again. By 2007, IDT was in financial trouble. His wife, Elina, was carrying their third child, and they would need to buy a bigger house. Serge agreed to interview with the Wall Street firm that especially wanted to meet him: Goldman Sachs.

... And then Wall Street called. Goldman Sachs put Serge through a series of telephone interviews, then brought him in for a long day of face-to-face interviews. These he found extremely tense, even a bit weird. “I was not used to seeing people put so much energy into evaluating other people,” he said. One after another, a dozen Goldman employees tried to stump him with brainteasers, computer puzzles, math problems, and even some light physics. It must have become clear to Goldman (as it was to Serge) that he knew more about most of the things he was being asked than did his interviewers. At the end of the first day, Goldman invited him back for a second day. He went home and thought it over: he wasn’t all that sure he wanted to work at Goldman Sachs. “But the next morning I had a competitive feeling,” he says. “I should conclude it and try to pass it because it’s a big challenge.”

... He returned for another round of Goldman’s grilling, which ended in the office of one of the high-frequency traders, another Russian, named Alexander Davidovich. A managing director, he had just two final questions for Serge, both designed to test his ability to solve problems.

The first: Is 3,599 a prime number?

Serge quickly saw there was something strange about 3,599: it was very close to 3,600. He jotted down the following equations: 3599 = (3600 – 1) = (602 – 12) = (60 – 1) (60 + 1) = 59 times 61. Not a prime number.

The problem wasn’t that difficult, but, as he put it, “it was harder to solve the problem when you are anticipated to solve it quickly.” It might have taken him as long as two minutes to finish. The second question the Goldman managing director asked him was more involved—and involving. He described for Serge a room, a rectangular box, and gave him its three dimensions. “He says there is a spider on the floor and gives me its coordinates. There is also a fly on the ceiling, and he gives me its coordinates as well. Then he asked the question: Calculate the shortest distance the spider can take to reach the fly.” The spider can’t fly or swing; it can only walk on surfaces. The shortest path between two points was a straight line, and so, Serge figured, it was a matter of unfolding the box, turning a three-dimensional object into a one-dimensional surface, then using the Pythagorean theorem to calculate the distances. It took him several minutes to work it all out; when he was done, Davidovich offered him a job at Goldman Sachs. His starting salary plus bonus came to $270,000.

... One small example of the kind of problems Serge found: Goldman’s trading on the NASDAQ exchange. Goldman owned the lone (unmarked) building directly across the street from NASDAQ in Carteret, New Jersey. The building housed Goldman’s dark pool. When Serge arrived, 40,000 messages per second were flying back and forth between computers inside the two buildings. Proximity, he assumed, must offer Goldman Sachs some advantage—after all, why else buy the only building anywhere near the exchange? But when he looked into it he found that, to cross the street from Goldman to NASDAQ, a signal took five milliseconds, or nearly as much time as it took a signal to travel on the fastest network from Chicago to New York. “The theoretical limit [of sending a signal] from Chicago to New York is something like seven milliseconds,” says Serge. “Everything more than that is the friction caused by man.” The friction could be caused by physical distance—say, if the signal moving across the street in Carteret, New Jersey, traveled in something less direct than a straight line. It could be caused by computer hardware. (The top high-frequency-trading firms chuck out their old gear and buy new stuff every few months.) But it could also be caused by slow, clunky software—and that was Goldman’s problem. Their high-frequency-trading platform was designed, in typical Goldman style, as a centralized hub-and-spoke system. Every signal sent was required to pass through the mother ship in Manhattan before it went back out into the marketplace. “But the latency [the five milliseconds] wasn’t mainly due to the physical distance,” says Serge. “It was because the traffic was going through layers and layers of corporate switching equipment.” ...

In this last paragraph Aleynikov sounds more like Sakharov than a millionaire quant ;-)

“If the incarceration experience doesn’t break your spirit, it changes you in a way that you lose many fears. You begin to realize that your life is not ruled by your ego and ambition and that it can end any day at any time. So why worry? You learn that, just like on the street, there is life in prison, and random people get there based on the jeopardy of the system. The prisons are filled with people who crossed the law, as well as by those who were incidentally and circumstantially picked and crushed by somebody else’s agenda. On the other hand, as a vivid benefit, you become very much independent of material property and learn to appreciate very simple pleasures in life such as the sunlight and morning breeze.”