Errors show dangers persist in electronic markets
For all the efforts to shore up electronic markets in the aftermath of one of the biggest trading catastrophes in the United States, Tuesday's options malfunction by Goldman Sachs shows the dangers have not gone away.
A programming error caused the firm to send unintentional stock options orders in the first minutes of trading, pushing prices on dozens of contracts to US$1 each, according to a person briefed on the matter.
Any losses for Goldman, the fifth-largest US bank by assets, would not be known until exchanges determined which contracts should be cancelled, the person said.
Investors who fret about the rising dominance of electronic exchanges say the error at Goldman, which generated about half its revenue from trading in the past quarter, shows that worse breakdowns are inevitable.
A year ago, Knight Capital was pushed to the brink of bankruptcy by a trading breakdown, and Chinese regulators are investigating Everbright Securities after US$3.8 billion of incorrect buy orders sent the Shanghai Composite Index up about 6 per cent in two minutes last week.
"It can happen to anybody, no firm is immune," said Matt McCormick, a money manager at Bahl & Gaynor.
An internal system that Goldman uses to help prepare to meet market demand for equity options inadvertently produced orders with inaccurate price limits and sent them to exchanges, according to the person familiar with the situation. Some of the transactions have already been voided.
A "large number" of trades from the session's first 17 minutes for tickers beginning with the letters H to L are being examined and most of the transactions may be cancelled, according to a statement from NYSE Euronext's US options business.
Of the 500 biggest options trades in the first 15 minutes markets were open on Tuesday, 405 were for tickers starting with H to L and at US$1. Almost 130 of those were in 1,000-contract lots.
"To bust a trade in equities it's relatively straightforward, to bust a trade in options it would take more time," said Howard Tai, an analyst with Aite Group. "You need to look at each one of the factors and then run through a sanity check, and say, 'Beyond the cash equity price at the time it happened, how did everything else affect it?'"