The Financial Industry Regulatory Authority (FINRA) has fined Goldman Sachs Group Inc (NYSE:GS) $800,000 for failing to prevent trade-throughs on 395,000 trades from its SIGMA-X dark pool between July 29, 2011 and August 9, 2011. Goldman Sachs also returned $1.67 million to investors whose trades were affected during that period.
Market data latency caused the trade-throughs: FINRA
“It is imperative that firms take steps to ensure compliance with the SEC‘s trade-through rule so that displayed trading interest is appropriately protected and customers do not receive executions at inferior prices,” said Thomas Gira, Executive Vice President, FINRA Market Regulation. “In today’s highly automated trading environment, FINRA has no tolerance for firms that fail to have robust policies and procedures to protect against trading through protected quotations.”
Goldman Sachs Group Inc (NYSE:GS) neither admitted nor denied any wrongdoing, but to be clear it isn’t being charged with intentionally executing trade-throughs. FINRA says that Goldman Sachs was inadvertently allowing trade-throughs because of a latency in the market data that its dark pools were using and the lack of proper procedures to protect against such problem, but it says the problem existed for a lot more than eight days.
Goldman Sachs had lax oversight for nearly three years
“From November 2008 through August 2011, Goldman Sachs Group Inc (NYSE:GS) failed to establish, maintain, and enforce written policies and procedures that were reasonably designed to prevent trade-throughs of protected quotations in NMS stocks; and failed to regularly surveil to ascertain the effectiveness of its policies and procedures,” says the FINRA announcement.
It’s not clear why Goldman Sachs Group Inc (NYSE:GS) was fined for this eight-day period when it failed to properly oversee its SIGMA-X dark pool for nearly three years. It’s possible that the lack of oversight lasted three years but the latency didn’t crop up until July 2011, and that Goldman Sachs changed its procedures after spotting the problem, but it wasn’t clarified in FINRA’s statement.
Trade-throughs are when brokers don’t take the best quote on the market (either by mistake or intentionally) in violation of Reg NMS. While Reg NMS is intended to ensure fairness and efficiency, it has been criticized recently for contributing to the fragmentation of the market and for only taking top-of-the-book prices into account instead of looking at the total cost of executing a large trade on a given exchange.