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From Securities Regulation Daily, June 30, 2015

Goldman Sachs hit with $7 million penalty over market access rule violations

By Amanda Maine, J.D.

Goldman, Sachs & Co. agreed to pay a $7 million civil monetary penalty to settle charges relating to erroneous executions of options contracts. Goldman Sachs allegedly had inadequate safeguards that resulted in the firm sending several thousand mispriced options orders following a new electronic trading functionality (In the Matter of Goldman, Sachs & Co., Release No. 34-75331, June 30, 2015).

Market access rule. The SEC’s market access rule (Rule 15c3-5) establishes several requirements for broker-dealers, including the implementation of controls and procedures that are reasonably designed to prevent the entry of erroneous orders that exceed appropriate price or size parameters and orders that exceed pre-set credit and capital thresholds.

August 2013 incident. On August 20, 2013, Goldman Sachs erroneously sent approximately 16,000 mispriced options orders to various options exchanges.  This occurred after Goldman Sachs implemented a new electronic trading functionality designed to match internal options orders with client orders. According to the SEC, a software configuration error resulted in converting Goldman Sachs’s “contingent orders” for certain options series into live orders and assigned them a price of one dollar. In pre-market trading, the orders were sent to options exchanges and 1.5 million options contracts were executed within minutes. Most of these “clearly erroneous trades” were later canceled or received price adjustments.

Findings. The SEC’s order found that Goldman Sachs employed unreasonably wide price checks for its options orders.  The SEC also found deficiencies in Goldman Sachs’s circuit breaker procedures, specifically citing one employee who lifted blocks that automatically shut off options order messages set to stop once they exceeded a certain level.  The SEC also took issue with Goldman Sachs’s written procedures about the implementation of software changes, finding that they did not take precautionary steps that likely would have prevented the incident for which the firm was charged.

Charges and settlement. The SEC’s order instituting administrative proceedings charged Goldman Sachs with violating the market access rule for having deficient controls that should have prevented orders that would cause the firm to exceed its pre-set capital threshold. To settle the proceeding, Goldman Sachs agreed to pay a civil monetary penalty of $7 million, to cease and desist from further violations, and to be censured. Goldman Sachs did not admit or deny the charges.

In a press release announcing the settlement, Enforcement Director Andrew Ceresney said, “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.”

The release is No. 34-75331.

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