Goldman Sachs settles options order claims
Goldman Sachs has agreed to pay over US$6 million in settlements to
US options venues after its order entry system unfairly prioritised market making activity as customer flow.
The settlement pertains to Goldman’s G2 and Stride order systems, which defaulted to a client
order origin code for trades conducted by market makers and brokers, giving some
orders and crosses priority to which they were not entitled.
The firm will pay US$6.75 million to eight options exchanges affected, with the Chicago Board Options Exchange
(CBOE) receiving the largest chunk – US$3.75 million.
A letter of consent dated 20 September from Goldman Sachs was sent to the Business
Conduct Committee of the CBOE outlining the errors, which occurred from around
January 2004 to May 2010.
The letter, which appeared on the CBOE website, allows the investment bank to settle the matter and avoid admitting or denying wrong-doing.
Mislabelling orders affected execution as venues
seeking to attract flow prioritise customer orders over those from market
makers. The official audit trail of executions and fees paid to exchanges would
also be affected by mislabelling.
The letter points out that the G2 system did not include a
market maker order origin code and defaulted automatically to the customer
origin code if a user did not select one.
“Goldman Sachs, as a result of the deficiencies in the order
entry systems…marked a number of options orders with an improper origin code
resulting in the execution of orders and crosses, some of which may have been
afforded priority to which they were not entitled,” the letter reads.
Goldman Sachs has updated the order systems involved and will
offer training concerning options origin codes for users of the systems as
measures to correct the error.
The exchanges affected besides CBOE are BATS, Boston Options
Exchange, International Securities Exchange, Nasdaq Options Market, Nasdaq OMX
PHLX, NYSE Amex and NYSE Arca, and will all receive portions of the remaining US$3
million from Goldman Sachs.