Goldman Sachs Said to Send Stock-Option Orders by MistakeNikolaj Gammeltoft and Donal Griffin
A programming error at Goldman Sachs Group Inc. caused unintended stock-option orders to flood American exchanges this morning, roiling markets and shaking confidence in electronic trading infrastructure.
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, said a person familiar with the situation, who asked not to be named because the information is private. The size of the losses depends on which trades are canceled, the person said. Some have already been voided, data compiled by Bloomberg show.
The mishap comes about a year after computers run by Knight Capital Group Inc. flooded U.S. equity markets with erroneous orders, a mistake that almost put the market-making firm out of business. Goldman’s error is fuel for critics of America’s electronic market structure, coming four months after the Chicago Board Options Exchange was shut down for 3 1/2 hours by a computer malfunction.
“This unfortunately was an error, and in the financial world an error can be a million-dollar error,” Chip Hendon, the Cincinnati-based senior fund manager at Huntington Asset Management, said in a telephone interview. His firm oversees $16 billion. “You can use the computer, but there has to be that human touch as well to try and catch errors.”
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 Goldman Sachs spokesman David Wells.
At least three operators of U.S. options exchanges are reviewing trades that took place at the beginning of the day and NYSE Amex Options said most of the transactions may be canceled. NYSE Amex Options will be unable to complete all trade reviews during normal business hours and will give participants until 9:30 a.m. New York time tomorrow to appeal its decisions, the exchange said in an e-mail.
A “large number” of trades in tickers beginning with letters H through L in the first 17 minutes are being examined, according to a statement from NYSE Amex Options. CBOE Holdings Inc., the largest venue, said it is looking at trades between 9:30 and 9:41 a.m. and will continue to adjust and bust error trades until 7 p.m. New York time, according to its website.
Nasdaq OMX Group Inc. is reviewing options transactions from 9:30 to 9:47 a.m., according to its website. About a dozen venues compete to match options orders in the U.S. through a variety of pricing and order strategies.
Of the 500 biggest options trades in the first 15 minutes markets were open today, 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.
The trading may have affected about 400,000 contracts for companies such as JPMorgan Chase & Co., Johnson & Johnson and Kellogg Co., based on data for the 500 biggest trades. Nasdaq OMX PHLX is reviewing a list of about 1,225 unique contracts on 51 underlying stocks, according to its trader alert email.
About 240 September $103 put contracts for the iShares Russell 2000 Exchange-Traded Fund traded at $1 at 9:32 a.m. New York time today, down from as much as $3.32 two minutes earlier, data compiled by Bloomberg show. The next trade was executed at $3.27 at 9:33 a.m.
For the October $91 put contracts on the ETF, 993 options traded at $1 at 9:30 a.m., compared with 81 cents yesterday. The next trade 8 minutes later was for 15 contracts at 77 cents. The fund was the eighth-most traded ETF for the past month, data compiled by Bloomberg show.
Robert Madden, a spokesman for Nasdaq, Gail Osten, of CBOE, and Suzanne O’Halloran at Bats Global Markets Inc., declined to comment. Molly McGregor at International Securities Exchange and John Nester, an SEC spokesman, didn’t return phone calls and e-mails.
Amex, a unit of NYSE Euronext, reported “systems issues” earlier and asked that orders from the platform be removed from marketwide price quotes, a system known as the national best bid and offer. Options venues run by Nasdaq, Bats and CBOE routed orders away the exchange. Amex said systems were back to normal by 9:49 a.m. in New York.
“NYSE Amex Options is reviewing a large number of erroneous executions that took place this morning,” the exchange said in a note to traders. “As permitted by the rules, we anticipate that most of the impacted trades will be busted.”
The exchange said decisions would be made using its rules for obvious and catastrophic errors, which are based on how far the price of a contract deviates from previous trades. If they don’t qualify as an obvious error, U.S. exchange may be reluctant to cancel them, according to Neal Wolkoff, former chief executive office of the American Stock Exchange.
“Since everyone is under scrutiny and you want to be even-handed, the exchanges tend to be pretty wary about going outside the standard benchmarks for what’s considered erroneous trades,” he said in a telephone interview today.
NYSE Euronext briefly halted trading yesterday in about 40 exchange-traded funds and notes when the securities were added to a program aimed at curbing sudden price swings. They were set off during implementation of the protocol known as limit up/limit down that pauses securities when bid-ask spreads become too wide, the exchange said.
Unintended trades sent from Knight Capital’s computers flooded markets a year ago. The fault caused shares to swing as much as 151 percent and left the firm with $450 million trading loss that sent it to the brink of bankruptcy. A group of Wall Street firms later rescued the company with a cash infusion and Getco LLC acquired the company this year.
Canceling the Goldman trades won’t guarantee nobody will suffer losses, according to Ophir Gottlieb, managing director of options analytics firm Livevol Inc. in San Francisco. Market makers who hedged the options transactions in the stock market may still be at risk, he said in a telephone interview.
“The firm or firms that created the error have absolutely no wealth at risk because they get their options trades canceled,” Gottlieb said. “But the people that facilitate market liquidity get crushed.”