Goldman fined by options exchanges over order marking

Goldman Sachs agreed to pay a $6.75m fine to eight US stock option exchanges to settle allegations it improperly marked trading orders that may have allowed some trades to get executed ahead of others.

The exchanges say that between 2004 and 2010 Goldman marked certain options trades on behalf of client broker-dealers and market-making firms with improper codes, calling them "customer" orders, a designation that would have given those trades a priority in handling that they shouldn't have gotten.

The misstep also meant some firms avoided paying certain exchange fees charged to market makers, according to the exchange notices.

The exchanges say Goldman failed to adequately respond to various red flags relating to the system coding, some of them raised by its own employees.

The two sides have reached the settlement quietly over the last few months, according to notices posted by several of the trading venues in recent days.

Goldman, which neither admitted nor denied wrongdoing but agreed to a censure, also agreed to pay an unspecified amount of uncollected fees to the exchanges because of the mismarked trades. "We are pleased to have resolved these matters," a spokesman said on Monday.

The matter comes at a time of renewed scrutiny over whether some traders are getting unfair advantages ahead of the broader public.

Last month, the Securities and Exchange Commission reached a $5m settlement with NYSE Euronext, operator of the New York Stock Exchange, over technology issues that allegedly gave some customers access to trading information before others. It was the first time the SEC had ever brought a case against an exchange that resulted in a monetary penalty.

In the NYSE case, differences in the design of computer systems and software issues resulted in some customers getting stock price and trading data several seconds before the rest of the public. The issues dated back to 2008, the SEC said. NYSE neither admitted nor denied wrongdoing.

In April, CBOE, operator of the Chicago Board Options Exchange, launched a wide-ranging review of firms doing business on its options markets, examining "apparent violations" of rules governing the way customer orders were handled over a period of years.

Orders designated as coming from "customers," including retail investors and mutual fund advisors, are treated differently on US options exchanges than those designated as coming from "market makers," which are firms and individuals that commit to buy and sell options contracts in an effort to earn profits on price spreads.

On exchanges like the CBOE and the International Securities Exchange, trades designated as coming from "customers" are given priority and earn small rebates paid by the exchanges as an incentive to do business on those markets.

In return, market-makers pay fees to the options exchanges to trade against those customer orders.

In Goldman's case, exchange officials traced the order coding issue back to systems installed by Goldman Sachs to handle its options trading, including one for "simple" orders introduced in 2004 and a separate platform for more complex trades that went into operation in 2008.

The older trading system, called "G2," didn't allow users to identify options orders as being placed by market makers, with the default designation identifying orders as coming from customers like institutional investors.

The system for handling complex orders, called "Stride," identified all orders as originating from customers, and didn't let users choose any other designation, according to notices from options exchange officials.

The settlement includes a $3.75m fine paid to the CBOE. The seven other exchanges, including Bats Exchange, Boston Options Exchange, International Securities Exchange, Nasdaq Options Market, Nasdaq OMX PHLX, NYSE Amex and NYSE Arca, will share $3m.

Separately, International Securities Exchange said its share of the $3m fine was $1.07m and it said it will recoup $899,440 in uncollected fees.

The settlement also says Goldman failed to maintain supervisory systems and controls relating to order entry from January 2004 to May 2010. It also didn't respond adequately to red flags raised "on several occasions" by its own employees, according to the settlement.

Goldman will enhance its systems for options orders and provide training for employees, according to the settlement.