SEC Charges Goldman Sachs With Violating Market Access Rule

The Securities and Exchange Commission today charged Goldman, Sachs & Co. with violating the market access rule in connection with a trading incident that resulted in erroneous executions of options contracts.

Goldman Sachs agreed to pay a $7 million penalty to settle the charges.

An SEC investigation found that Goldman Sachs did not have adequate safeguards to prevent the firm from erroneously sending approximately 16,000 mispriced options orders to various options exchanges in less than an hour on Aug. 20, 2013, after the firm implemented new electronic trading functionality designed to match internal options orders with client orders.  A software configuration error inadvertently converted the firm’s “contingent orders” for various options series into live orders and assigned them all a price of $1.  These orders were then sent to the options exchanges during pre-market trading, and approximately 1.5 million options contracts were executed within minutes after the opening of regular market trading.  Many of the executed trades were later canceled or received price adjustments pursuant to the options exchanges’ rules on clearly erroneous trades.

According to the SEC’s order instituting a settled administrative proceeding, Goldman Sachs further violated Securities Exchange Act Rule 15c3-5 by having deficient controls for preventing orders that would cause the firm to exceed its pre-set capital threshold.

“Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading,” said Andrew Ceresney, Director of the SEC Enforcement Division.  “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.”

Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “It is crucial for broker-dealers with market access to understand and control  the interaction of multiple electronic trading systems, not only to comply with Rule 15c3-5 but also to ensure the orderly operation of the markets as a whole.”

The SEC’s order made the following findings:

• Goldman employed unreasonably wide price checks for its options orders during pre-market hours.  Had appropriate price bands been in place similar to those Goldman used during regular trading hours, thousands of the erroneous orders all priced at $1 would have been intercepted and not sent to exchanges. 
• On Aug. 20, 2013, a Goldman employee lifted several electronic circuit breaker blocks that automatically shut off outgoing options order messages once the rate of messages exceeded a certain level.
• Goldman’s policies regarding these circuit breakers were not properly disseminated or fully understood by employees with responsibilities relating to the circuit breakers.
• Goldman’s written policies relating to the implementation of software changes did not require several precautionary steps that, if taken, would likely have prevented the erroneous options incident.
• In a separate failure that did not relate to the trading incident, Goldman did not maintain adequate controls designed to prevent the entry of orders that exceed the firm’s capital threshold.  The firm only computed its capital usage level every 30 minutes, did not have an automated mechanism to shut off orders in the event that the firm exceeded its capital threshold, and failed for several months to include a number of business units in the firm’s capital utilization calculation, thereby underestimating the firm’s trading risk.

Goldman consented to the SEC’s order without admitting or denying the findings.  In addition to paying the $7 million penalty, Goldman agreed to cease and desist from further violations of Section 15(c)(3) of the Exchange Act and Exchange Rule 15c3-5.

The SEC’s investigation was conducted by Market Abuse Unit staff Daniel Marcus, Charles Riely, and Matthew Koop and supervised by Mr. Hawke and the unit’s co-deputy chiefs Robert Cohen and Joseph Sansone.  Substantial assistance was provided by Rosanne Smith, Stephanie Morena, and Jennifer Conwell of the SEC’s National Exam Program and David Shillman, John Roeser, Richard Vorosmarti, and Carl Emigholz of the agency’s Division of Trading and Markets.