It was one small line in Michael Lewis’s book that was most important to those closely watching the high frequency trading debate that mattered most.  This line revealed the potential for HFT algorithims to fall into the “wrong hands” and cause untold economic damage. With the release of a Bloomberg report on the hacking of various hedge funds, the issue of terrorists and economic opportunists alike hacking into HFT firms and hedge funds comes squarely into focus.

Hedge Funds, HFT cyber attacks

Hedge funds digital footprint can be exploited by the hackers

When highlighting an FBI case about a former Goldman Sachs Group Inc (NYSE:GS) HFT employee, an FBI source was quoted in Flash Boys as saying the HFT computer code, if in the wrong hands, could be used to manipulate markets. And it’s not just HFT intellectual property that can cause damage in the wrong hands. All hedge funds have a digital footprint the hackers can exploit, and the threat is growing.

The Bloomberg report discusses the issue with a handful of computer security experts to determine that over the past two years organized bands of hackers, operating mainly from Eastern European countries, have targeted hedge funds, law firms and other Wall Street concerns that store and manage vital information using computer networks.

JPMorgan to spend millions on cyber security

The issue is a national security concern, but it is up to individual companies to better protect themselves. JPMorgan Chase & Co. (NYSE:JPM), for instance, will spend $250 million this year alone on cybersecurity. Former NSA director has opened a cybersecurity consultancy focused on the financial sector and is reportedly charging $1 million per month for services. The cybersecurity market is expected to jump to $95.6 billion in 2014 and reach $155.7 billion by 2019, according to a research report from Dallas-based MarketsandMarkets.

“This is a broad attack against the financial services sector,” Shawn Henry, a former executive assistant director at the FBI, was quoted as saying. Henry, like Alexander, moved from government service to private cybersecurity practice.  He claims millions of dollars have been stolen from multiple hedge funds over the last five years.

Various methods to attack a hedge fund

Hackers have various methods to attack a hedge fund, with differing degrees of sophistication. Some send e-mails that contain malicious links that open doors to a computer and, once inside, burrow into a networked computer system. Other common methods include “watering hole attacks” where company intranets and separate client web sites are hosted are the Trojan horse used for a cyber-attack.

“Firms are intently focused on identifying emerging threats and employing the newest, best mitigation techniques, Richard Baker, president and chief executive officer of The Managed Funds Association, which primarily represents hedge funds, said in an e-mail to Bloomberg.

Just last week a hacker attack on an HFT firm was made public by BAE Systems. In an ironic twist of events, the hackers had a quick millisecond look at the HFT firm’s intentions before their trades were executed. HFT firms have been accused to seeing other investors trades before they hit the exchange.