When Matthew Andresen used to work at Citadel Investment Group, there were 150 brokers on the list of firms that would get checks for executing its trades. Then, the list shrank to 50, then to 20, then a dozen.

Used to be as well that every broker had its own wholesaler, for execution services. Now, two wholesalers do almost 75 percent of all retail executions, Andresen said at TradeTech 2012 Wednesday, in a keynote presentation. He is now co-chief executive of Headlands Technologies, a global quantitative proprietary trading firm headquartered in San Francisco and Chicago.

Those are just two data points that show where the value of intellectual property is now located. In the past, he said, it was in the intellect of a human being – a trader, for instance. Now, it is in the intellect of a machine – the code that runs it.

“It used to be that the intellectual property was viewed as being just in the man or the seat. So a great sales trader would be competed over and he would switch seats two, three, four times in his career, to hop around and bring his benefit,’’ Andresen said.


“Now that order flow is being handled increasingly through the machines, the value becomes less the man and more the machine,’’ he said. “The machine becomes more and more valuable.”

The machine stores “accumulated institutional knowledge of how to execute” trades. The hard-won lessons about how to divide up an order. How to interact on a particular marketplace.

The result has been a behind-the-scenes battle between the producers of the intellectual property, the programmers, and the owners of this intellectual property, the banks and trading firms.

This has resulted in a “few extreme spectacular cases’’ where programmers and firms end up at loggerheads over whether the code that came out of the programmers’ intellect can in any fashion move when the programmer moves to a new machine.

A year ago, trader Samarth Agrawal was sentenced to three years in prison for stealing the high-speed trading software from Societe Generale.

A federal jury in Manhattan in November found Agrawal, 27, guilty of theft of trade secrets and of transporting stolen property in interstate commerce. Agrawal testified that he shared information about Societe Generale’s trading software with a Manhattan hedge fund.

In a 2009 case, former Goldman Sachs programmer Sergey Aleynikov was convicted of stealing computer code that Goldman Sachs used to perform proprietary trading. He allegedly placed the code on a server in Germany, so he could later download it. He had left Goldman to join a Chicago start-up, at higher pay.

He was convicted two counts of theft of trade secrets and transportation of stolen property and sentenced to 97 months in prison. But last month, the United States Court of Appeals for the Second Circuit heard oral argument on his appeal and ordered his conviction


Similar battles in court in the next five years will determine the level of criminalization that is involved with moving code or minds between machines, Andresen said.

The question will be whether courts “believe that (the code) is a commercial product that is sold interstate or do they believe it is merely a trade secret?” he asked.

How they rule will determine whether the intellectual property can be held inside one firm’s machines “or whether it becomes diffused across different firms,” as men and their minds move about.

Tom Steinert-Threlkeld writes for Securities Technology Monitor.