Erroneous trades, which disrupted trading activity on several options exchanges on Tuesday, could cause Goldman Sachs (NYSE:GS) to lose as much as $100 million if they are not cancelled, sources told the Financial Times. Because of these trades, exchanges run by NYSE Euronext (NYSE:NYX), the Chicago Board Options Exchange (NASDAQ:CBOE), and Nasdaq OMX (NASDAQ:NDAQ) said they are reviewing the transactions.
A person familiar with incident explained to the publication that Goldman Sachs mistakenly issued orders into the stock-options market early Tuesday. The financial institution’s computer system, which normally takes expressions of client interest, had misfired, sending those expressions as actual orders to the exchanges.
Even worse, some of the orders were sent with the default prices that did not match market prices, the Financial Times reports. The erroneous orders were placed on options on securities with ticker symbols beginning with the letters H through L.
The bank will now review the system that malfunctioned, the source said. A spokesman for Goldman Sachs confirmed that statement. “The exchanges are working to resolve the issue,” he said. “Neither the risk nor the potential loss is material to the financial condition of the firm.”
Similarly, NYSE Euronext officials said in a notice to traders that they “anticipate that most of the impacted trades will be busted,” according to The Wall Street Journal. A spokesman from the NYSE maintained that no technological problems had affected its Amex exchange.
The problem was uncovered when a large number of trades outside the ordinary price range hit the United States options markets in the opening minutes of trading Tuesday. Goldman’s technical problems, which led to the flood of unusual trades, even pushed some stock-options prices to $1, forcing exchanges to review the trades and consider canceling many of them, The Wall Street Journal reports. Market rules allow exchanges to “bust,” or void, trades that are judged to have been made in error.
Traders believe that a misfired trading algorithm caused the problem, which affected both individual stocks and exchange-traded funds.
Tuesday’s problem is only the most recent episode in a series of malfunctions caused by the technology that runs the United States’s financial markets. In February 2012, a rogue trading program flooded the options market with approximately 30,000 erroneous trades, requiring officials to void and adjust transactions to rectify the problem.
And just over a year ago, Knight Capital Group lost $461.1 million thanks to defective trading software, an episode that was a factor in the firm’s sale to Getco, a rival trading group. These issues will put the risks of the high-speed systems firms use to trade securities and derivative contracts under regulators’ microscopes.
Even more publicized and devastating were the trade errors that plagued Facebook’s (NASDAQ:FB) initial public offering on the Nasdaq. The problem originated with a design flaw in Nasdaq’s systems, and, in particular, with how it paired IPO buy and sell orders.
More than 30,000 orders for Facebook stock were stuck in the Nasdaq system for longer than two hours when they should have been promptly executed or cancelled. As a result, Wall Street firms attempting to buy and sell the stock lost an estimated $500 million.
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