The Goldman Sachs Group, Inc. GS is set to pay $7 million to settle the U.S. Securities and Exchange Commission (SEC) charges relating to a trading glitch in August 2013. The firm mistakenly sent thousands of orders, roiling the options market.
Per the SEC order, Goldman failed to have sufficient safeguards to prevent the firm from sending around 16,000 mispriced options orders to several options exchanges in less than an hour on Aug 20, 2013.
Due to a software configuration error, the firm’s contingent orders for various options series converted into live orders and all such orders were priced at $1.00. These orders were then sent to the options exchanges before the opening of the market. However, within minutes of the opening of regular market trading, around 1.5 million options contracts were executed.
The SEC stated that Goldman was exposed to a potential loss of $500 million. However, as several of the executed trades were later canceled or price of the trades received adjustments, Goldman ultimately incurred a loss of $38 million.
Among its findings, the SEC mentioned that the problem aggravated further as an employee in Goldman’s ‘Mission Control’ – a unit that monitored the bank's option-trading system – lifted circuit breakers designed to prevent erroneous orders, without receiving proper authorization. SEC also found that Goldman’s policies with respect to these circuit breakers “were not properly disseminated or fully understood by employees with responsibilities relating to the circuit breakers.”
The SEC claimed that Goldman violated the market access rule that requires brokers or dealers to have appropriate controls for the risks associated with market access and prevent any disruptions. Notably, the market access rule was adopted following the ‘Flash Crash’ in May 2010 when $1 trillion of market value was briefly wiped from U.S. stocks.
Andrew Ceresney, director of the SEC Enforcement Division stated “Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading. He further added “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 neither accepted nor denied the findings of the SEC. The company is pleased with settlement. Per a company spokesperson, “Since the incident, we have reviewed and further strengthened our controls and procedures.”
Financial institutions continue to rely on computers and embrace technology. However, the latest technical glitch reminds that over dependence on it poses substantial risk. Hence they should exercise more caution and employ proper control system to avoid any unforeseen event in the market.
Goldman currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Morgan Stanley MS, WisdomTree Investments, Inc. WETF and TD Ameritrade Holding Corporation AMTD. All three stocks carry a Zacks Rank #2 (Buy).
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