August 21, 2013 6:58 pm

SEC scrutinises Goldman’s trading failure

A Goldman Sachs sign is seen at the company's post on the floor of the New York Stock Exchange©Reuters

Money markets are ‘a very necessary’ part of business

US regulators and enforcement officials are scrutinising the systems malfunction at Goldman Sachs as part of a broad response to the latest high-profile trading failure to damage investor confidence, say people familiar with the matter.

The Securities and Exchange Commission’s involvement comes as leading US exchanges, including those run by NYSE Euronext, worked through the night to determine whether to cancel, adjust or break erroneous trades that could end up costing Goldman tens of millions of dollars.

SEC officials were preparing for internal meetings as they try to determine what went wrong with Goldman’s systems and why the bank inadvertently flooded the US options market with a large number of unintended trades in companies such as JPMorgan Chase and Kellogg. Goldman declined to comment. The SEC said it was monitoring developments.

The securities watchdog has been cracking down on exchanges and brokers for systems failures out of concern that the episodes are undermining US market confidence. Regulators are worried that market participants are in a competitive race to develop speedier systems at the expense of safeguarding controls around the automated trading programmes.

People close to the regulator said they saw early parallels between Goldman’s technology error and what happened at Knight Capital last August, when an errant algorithm cost the broker $461m and required an industry bailout to stem significant capital shortfalls.

The SEC’s enforcement attorneys are actively looking into Goldman’s trading glitch to determine if any rules were violated before, during and after the trading error, one person said.

The trading glitch occurred in an internal system used by Goldman to determine its “Axes” – trading vernacular for the interest that the bank might have in buying or selling a particular security – according to a person familiar with the matter.

The computerised system was in the process of being updated and started accidentally sending what should have been internal signals to outside exchanges as executable orders, the person said.

The ensuing chaos is said to have sparked an internal scramble at Goldman, with the bank convening an emergency team of traders and technology specialists to resolve the issue. Some staff were roused from their traditional August vacations to deal with the problem.

Meanwhile, exchange officials at NYSE Euronext, Nasdaq OMX and CBOE worked quickly to evaluate which trades should be marked erroneous, cancelled or held up. Those decisions will ultimately affect the size of Goldman’s losses but people familiar with the situation said they could amount to something in the range of $100m.

In an alert from its Amex options exchange, where most of the trades were made, NYSE said that it would need more time to make its decisions.

“We believe potential losses are quite manageable for Goldman Sachs,” said Matthew Burnell, analyst at Wells Fargo. “Potential regulatory fines should be muted but reputational damage for the industry could further increase compliance costs for all participants.”

Additional reporting by Neil Munshi in Chicago

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