The New York-based bank failed to have adequate safeguards to prevent its computers from sending 16,000 mis-priced options orders to financial exchanges in less than an hour on Aug. 20, 2013, the Securities and Exchange Commission said Tuesday.
A software configuration error inadvertently converted Goldman Sachs’ contingent orders for various options series into live orders and assigned each a price of $1, the SEC said in a settlement order.
The problem was “exacerbated by human error,” the order said, referring to findings that showed Goldman Sachs personnel mistakenly overrode circuit breakers that would have prevented the mispriced orders from reaching options markets.
As a result, approximately 1.5 million options contracts were sent to options exchanges during pre-market trading. The contracts, placed on stocks with ticker symbols from I to K, were executed within minutes after the start of regular market trading that day, the SEC said.
The trades sent some prices down. Many of those transactions were later cancelled or had price adjustments pursuant to option exchanges’ rules regarding erroneous trades, the SEC said.
Goldman ultimately suffered $38 million in losses, based on the trade cancellations and price adjustments, the SEC said.
“Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading,” said Andrew Ceresney, head of the SEC’s enforcement division. “Goldman’s control environment was deficient in several ways, significantly disrupted the markets and failed to meet the standard required of broker-dealers under the market access rule.”
Goldman Sachs neither admitted nor denied the SEC allegations. But spokesman Michael DuVally said the bank was pleased with the resolution.
“Since the incident, we have reviewed and further strengthened our controls and procedures,” he said.
However, some market participants argued the SEC penalty should have been higher. Nanex CEO Eric Hunsader, whose company supplies market data to the financial industry, spotted the Goldman Sachs trading glitch as it occurred.
He argued that the SEC should have required a more costly settlement from the bank because the problem may have cost some of Goldman Sachs’ trading partners more than $7 million.
Goldman Sachs shares closed 0.55% higher at $208.79.