SEC Sanctions Goldman Based on Market Access Rule

The SEC filed another action based on its market access rule. This time the Respondent is Goldman, Sachs & Co., a wholly owned subsidiary of The Goldman Sachs Group, Inc. In the Matter of Goldman, Sachs & Co., Adm. Proc. File No. 3-16665 (June 30, 2015).

The action centers on erroneously sending 16,000 mispriced options orders to various option exchanges in less than an hour on August 20, 2013. Respondent Goldman is a registered broker dealer and a member of FINRA. One of the client service functions performed by the firm is the provision of options liquidity to electronic trading customers. This service was done in part through the use of a matching engine that attempts to pair the firm’s indications of interest against customer orders for the particular option contract. If there was a match the paired order was sent to an exchange for execution. If there was no match the customer order was routed to an exchange. The firm’s indications of interest, called axes, were contingent in price, size and other parameters. They were not intended to go to the exchanges unless paired with a customer order. To the contrary, axes were intended to remain in the matching engine and search for customer orders to pair-off.

On August 20, 2013, as a result of a configuration error in one of the firm’s options order routers, Goldman sent thousands of $1 limit orders to options exchanges prior to the start of regular market trading. Before the market opened the firm halted the creation of orders and began canceling the erroneous ones that had been sent for execution.

Shortly after the opening a portion of the orders were executed. Specifically, about 1.5 million options contracts representing 150 million underlying shares were executed. Goldman faced a potential $500 million loss, although in the end it was about $38 million in view of cancellations or price adjustments for erroneous trades.

The error resulted from a series of failures, according to the Order, which included:

  • The price checks in the options order matching system failed to prevent the entry of the erroneously priced pre-market orders;
  • Goldman’s circuit breakers did not effectively block the orders because its control staff repeatedly lifted them during the pre-market and for two minutes after the open;
  • The firm’s policies relating to the manual lifting of the circuit breakers were not disseminated to, or fully understood by, the responsible employees; and
  • The firm had inadequate policies and procedures with regard to software changes that impacted its order flow.

Goldman also had inadequate risk management controls and supervisory procedures relating to the prevention of orders that exceeded the firm’s pre-set capital threshold. The Order alleges Exchange Act Section 15(c)(3) and Rule 15c-3-5.

To resolve the proceeding Goldman consented to the entry of a cease and desist order based on the Section and Rule cited in the Order as well as to a censure. In addition, the firm agreed to pay a civil penalty of $7 million.

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