Back in August of 2013, Goldman Sachs had just installed a new software system to assist in determining the prices at which the firm would buy or sell options. They thought they had worked out the kinks, but one morning the software sent out 16,000 mispriced options orders in less than an hour. The options market kicked into high gear when this flood of orders hit, causing huge downward moves in many options series.
The investigation determined that in fact a Goldman employee mistakenly intervened to override safeguards the firm had in place to prevent these kind of rogue orders.
The SEC announced on Tuesday evening that they had reached a $7 million settlement with Goldman regarding the matter. The agency noted that Goldman Sachs lacked the proper safeguards to prevent these kind of erroneous orders from occurring. A part of the settlement, the megabank and brokerage agreed to revamp its options ordering operations
Details on Goldman Sachs’ 2013 option order snafu
The SEC statement noted that Goldman Sachs had circuit-breakers in place to stop this kind of errant order, but in this case a Goldman employee had manually overridden the safeguards on this occasion without checking with the IT department, making it possible for the landslide of bad orders to hit the market.
Exchanges ended up cancelling nearly all of the trades resulting from the erroneous orders, cutting Goldman’s potential $500 million in trading losses to just $38 million, according to the SEC.
Several Goldman Sachs employees were put on leave during the investigation. According to a knowledgeable source, the employees are either no longer with the firm or are still on leave. The firm announced the hiring of a new CIO, R. Martin Chavez, and the retirement of Steven Scopellite, just a few weeks after the incident.
“We’re pleased to have concluded this settlement with the SEC,” a Goldman spokesman said in a statement released Tuedsay. “Since the incident, we have reviewed and further strengthened our controls and procedures.”
Goldman Sachs neither admitted nor denied the SEC’s findings in the settlement.
What happened was a software error converted the firm’s contingent orders into live ones, and priced them all at $1. This ended up causing close to 1.5 million options contracts executing in a half hour during pre-market trading.
The August 2013 incident was one of a number of technology-related snafus in financial markets in recent years, making clear the markets’ increasing reliance on IT and the risks related to that dependence. Although this incident wasn’t nearly as expensive as famous the 2010 “flash crash,” Facebook’s glitchy IPO or the trading software error that buried Knight Capital Group, it shows even the most technologically savvy brokers can face serious IT issues.