Goldman’s options error shows peril persists after Knight

For all the efforts to shore up electronic markets in the aftermath of one of America’s biggest trading catastrophes, yesterday’s options malfunction by Goldman Sachs Group Inc. shows the dangers haven’t gone away.

A programming error caused the firm to send unintentional stock options orders in the first minutes of trading, pushing prices on dozens of contracts to a dollar each, according to a person briefed on the matter yesterday and data compiled by Bloomberg. Any losses for Goldman Sachs, the fifth-largest U.S. bank by assets, won’t be known until exchanges determine which contracts should be canceled, said the person, who requested anonymity because the information is private.

Investors who fret about the increasing dominance of electronic exchanges say the error at Goldman Sachs, which generated about half its revenue from trading last quarter, shows that worse breakdowns are inevitable. A year ago, Knight Capital Group Inc. was pushed to the brink of bankruptcy by a trading breakdown, and Chinese regulators are investigating broker Everbright Securities Co. after $3.8 billion of incorrect buy orders sent the Shanghai Composite Index up about 6% in two minutes last week.

“It can happen to anybody, no firm is immune,” Matt McCormick, who helps oversee $9.6 billion as a money manager at Cincinnati-based Bahl & Gaynor Inc., said in a phone interview. “Because it’s Goldman Sachs, the error could be pretty large.”

Sorting Trades

Exchanges were working to sort out the trades and any loss “would not be material to the financial condition of the firm,” according to an e-mail from David Wells, a spokesman for New York-based Goldman Sachs. The company’s shares slipped 0.6% to $158.68 at 9:51 a.m. New York time.

An internal system that Goldman Sachs uses to help prepare to meet market demand for equity options inadvertently produced orders with inaccurate price limits and sent them to exchanges yesterday, according to the person familiar with the situation. Some of the transactions have already been voided, data compiled by Bloomberg show.

A “large number” of trades from the session’s first 17 minutes for tickers beginning with the letters H through L are being examined and most of the transactions may be canceled, according to a statement yesterday from NYSE Euronext’s U.S. options business. NYSE and Nasdaq OMX Group Inc. said today that they have completed the trade reviews, according to e-mailed statements from the exchanges.

Options Trades

Representatives for other U.S. options market operators -- Nasdaq’s Robert Madden, CBOE Holdings Inc.’s Gail Osten, International Securities Exchange LLC’s Molly McGregor and Bats Global Markets Inc.’s Suzanne O’Halloran -- all declined to comment.

“As is our practice, we have been monitoring developments and talking with the exchanges and other market participants as appropriate,” Securities and Exchange Commission spokesman John Nester said in an e-mail.

Of the 500 biggest options trades in the first 15 minutes markets were open yesterday, 405 of them were for tickers starting with H through L and priced at $1, according to data compiled by Trade Alert LLC and Bloomberg. Almost 130 of those were in 1,000-contract lots.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Comments
comments powered by Disqus