SEC Fines Goldman $7 Million Under Market Access Rule

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Goldman Sachs is resolving a Securities and Exchange Commission investigation into erroneous options orders sent out by GS computers with a $7 million settlement of charges that it violated the market access rule.

In the incident, Goldman’s computers sent 16,000 options orders with the price of $1 into the market. The orders for 1.5 million option contracts sent during pre-market trading were executed within minutes of the start of trading. The investment bank had risk controls in place to prevent it from happening, but an employee repeatedly lifted the circuit breakers designed to prevent suspected erroneous trades from executing without authorization. Goldman ultimately lost $38 million. Goldman settled charges that it violated the market access rule while neither admitting nor denying the allegations.

The market access rule requires broker-dealers to put adequate safeguards in place to limit risks posed by allowing customers to have access to the market. It also requires brokers with market access to put in place risk management and supervisory procedures to prevent erroneous orders. They are also required to undertake adequate reviews of the effectiveness of their controls.

When the SEC released information last year pursuant to a FOIA request that one of the top three job titles for its whistleblowers was an engineer, we speculated internally that electrical and computer engineers working on Wall Street were doing their share of submissions. Of course, an event like this would probably not require an SEC whistleblower as the market effect is rather obvious. However, an individual might be able to point the SEC to a problem in advance or give it information to open a new avenue of investigation.

The Goldman Sachs event is reminiscent of the August 1, 2012 disaster in the market for Knight Capital. Knight took a pre-tax loss of $440 million because of a mistake in the implementation of new software on its automated routing system for equities. The error led to transactions involving 397 million shares in 154 stocks before the problem was corrected. In 2013, the SEC fined Knight Capital Americas LLC $12 million to settle charges that it violated the market access rule. Knight was the first enforcement action under Rule 15c3-5, which was put in place in 2010.

The CFTC has been considering similar rules targeted at either High Frequency Traders or Automated Trading Systems in order to prevent market disruption.

If you have evidence of insufficient internal controls on automated market access, contact one of our SEC whistleblower attorneys to discuss reporting it to the appropriate agency at the U.S. Government. An attorney can be reached by our contact form or calling 1-800-590-4116.

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