Goldman Sachs To Pay $7M Penalty
It was an error that could have been prevented that ultimately ended up costing Goldman Sachs Group, Inc millions in penalty. According to a press statement issued by the U.S. Securities and Exchange Commission, Goldman Sachs has agreed to pay $7 million as settlement to the charges brought against them in regard to an embarrassing incident back in 2013.
According to a released SEC Order, Goldman Sachs had decided to implement a new electronic trading functionality that would automatically match internal options orders with its client orders on Aug 20, 2013. As this happened, a software configuration error in its order routers ended up converting Goldman Sachs’ contingent orders for various options series into live orders. These orders were all given a price of $1.
Goldman Sachs had tried, but failed to stop the sending of as much as 16,000 option orders that had wrong prices on them. These were sent immediately to different options exchanges. Within minutes of the regular market being open for trading, Goldman Sachs found itself receiving executions for some of its unintended sell orders. This totaled to about 1.5 million contracts, which amounts to about 150 million in underlying shares. The said incident has resulted in Goldman Sachs losing about $38 million.
According to Director of the SEC Enforcement Division Andrew Ceresney, “Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading. 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.”
Since that day, SEC has come up with several findings regarding the incident. For starters, Goldman Sach’s Sigma Options order matching system had failed to prevent the entry of wrongly priced pre-market orders. In fact, it was found that during the pre-market hours, Goldman Sach’s Sigma Options used a “default” price check, allowing option orders with a price higher than $0.01 but lesser than 1.5 times the highest closing price for any listed option from the previous day to go through. In contrast, the Sigma Options actually conducted price checks using the then-current bid and ask price for the listed option series during market hours.
Furthermore, SEC believes that the problem was further compounded when Goldman Sach’s electronic circuit breakers failed to block the wrong orders that were sent in August 20. These circuit breakers are actually expected to stop all message traffic to the exchanges the moment traffic had gone past a set rate. What may have caused it to fail, in SEC’s opinion is that, “the firm’s control personnel repeatedly lifted the circuit breakers blocks between 8:44 a.m. and 9:32 a.m., thereby permitting additional erroneous orders to be sent to the exchanges. Before lifting the circuit breaker blocks, the control personnel did not obtain authorization from the responsible technology employees, as required under written firm policies.”
Moreover, SEC believes that Goldman Sach’s employees did not have a comprehensive understanding of policies involving the manual controlling of its circuit breaker. They believe that policies were not properly disseminated or completely understood by the employees working in the affected department.
In an email, Goldman Sach’s Michael DuVally told Bloomberg Business, “We’re pleased to have concluded this settlement with the SEC. Since the incident, we have reviewed and further strengthened our controls and procedures.”
Meanwhile, the SEC has stated that, “Goldman consented to the SEC’s order without admitting or denying the findings.”