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Goldman Sachs Pays Fine for Roiling Options Market in 2013

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Goldman Sachs Group Inc. agreed to pay a $7 million fine to settle regulatory claims that it sent thousands of mistaken orders that roiled the U.S. options market almost two years ago.

The bank didn’t have adequate safeguards to prevent its computers from placing about 16,000 mispriced options orders on Aug. 20, 2013, the U.S. Securities and Exchange Commission said in a statement Tuesday. This led to about 1.5 million contracts trading at the beginning of that day’s session, before many of the transactions were later canceled.

“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,” Andrew Ceresney, the director of the SEC’s Enforcement Division, said in the statement.

The incident shook confidence in financial markets, though it was overshadowed two days later when an error at Nasdaq OMX Group Inc. shut much of the U.S. stock market for hours. Both breakdowns spurred the SEC to demand that trading firms and exchanges improve their systems to prevent catastrophes.

Goldman Sachs neither admitted to nor denied the regulator’s allegations.

Mission Control

The day before sending the fake orders, Goldman Sachs switched to a new system that was not properly configured and did so without notifying a unit known as “Mission Control” that monitored the option-trading group, according to the SEC.

The next morning, while the bank sent out fake trades, an employee in Mission Control exacerbated the situation by repeatedly lifting curbs that could have prevented the problem without getting authorization from the option traders. That allowed more incorrect orders to be sent to exchanges with potential losses reaching $500 million. Because of canceled trades and price adjustments, Goldman lost about $38 million, the SEC said.

All of the bank’s employees who were directly involved with the mistaken orders have either left the firm or been put on leave, said a person with direct knowledge of the matter who asked not to be named because he wasn’t authorized to discuss their status publicly.

“We’re pleased to have concluded this settlement with the SEC,” Michael DuVally, a spokesman for the New York-based bank, said in an e-mail. “Since the incident, we have reviewed and further strengthened our controls and procedures.”

The bank violated the so-called market-access rule, which was adopted after the May 2010 flash crash when $1 trillion of value was briefly erased from U.S. stocks. The rule seeks to reduce the risk of trading disruptions and improper and manipulative activity by requiring brokers to employ safeguards against erroneous orders.


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