By Justin Baer And Angela Chen
Goldman Sachs Group Inc. agreed to pay $7 million to settle the
top U.S. securities regulator's charges that the Wall Street firm
failed to prevent a technical glitch that sent out thousands of
erroneous trades in August 2013, roiling the market for stock
options.
In its order, the Securities and Exchange Commission said
Tuesday that Goldman lacked the safeguards to stop a software
program from sending 16,000 mispriced options orders in less than
an hour. The problem occurred shortly after Goldman had implemented
a new system that helps determine the prices at which the firm
would buy or sell options from clients.
The setback added to a string of technology snafus in recent
years, highlighting both the markets' growing reliance on computers
and the risks posed by that dependence. While the Goldman incident
wasn't as damaging as the 2010 "flash crash," Facebook Inc.'s
botched IPO or the trading software glitch that swamped Knight
Capital Group Inc., the episode had nevertheless stoked fears that
technology problems can strike even the most-sophisticated
brokers.
The SEC said Goldman's systems had circuit-breakers in place to
prevent errant orders, but a Goldman employee had repeatedly lifted
those blocks that morning without seeking the approval of the
firm's technology staff, flooding additional orders into the
market.
Exchanges, including NYSE Euronext Amex, had canceled most of
the trades that had resulted from the orders, limiting losses that
could have cost Goldman $500 million. The firm's losses ultimately
totaled just $38 million, the SEC said.
Goldman placed a handful of employees on leave as it reviewed
the episode. Those employees are either no longer with the firm, or
remain on leave, one person familiar with the matter said. A month
after the glitch, Goldman announced a new chief information
officer, R. Martin Chavez, and the retirement of his predecessor,
Steven Scopellite.
"We're pleased to have concluded this settlement with the SEC,"
a Goldman spokesman said in a statement. "Since the incident, we
have reviewed and further strengthened our controls and
procedures."
Goldman has neither admitted nor denied the SEC's findings.
An error had converted Goldman's contingent orders into live
ones all priced at $1. This resulted in about 1.5 million options
contracts executed within minutes during pre-market trading.
The orders, placed for options on stocks and exchange-traded
funds with ticker symbols beginning with the letters I through K,
drove some prices sharply lower. Many were later canceled or
adjusted. The firm racked up tens of millions of dollars in
losses.
"Firms that have market access need to have proper controls in
place to prevent technological errors from impacting trading," said
Andrew Ceresney, who is director of the SEC's enforcement
division.
Write to Justin Baer at justin.baer@wsj.com and Angela Chen at
angela.chen@dowjones.com
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