By Liz Moyer and Jacob Bunge
Goldman Sachs Group Inc. (GS) agreed to pay a $6.75 million fine
to eight U.S. 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 $5
million settlement with NYSE Euronext (NYX), 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 Holdings Inc. (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 U.S.
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 $3.75 million fine paid to the CBOE.
The seven other exchanges, including BATS Exchange Inc., Boston
Options Exchange Regulation LLC, International Securities Exchange,
Nasdaq Options Market, Nasdaq OMX PHLX Inc., NYSE Amex LLC and NYSE
Arca Inc., will share $3 million.
Separately, International Securities Exchange said its share of
the $3 million fine was $1.07 million 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.
Write to Liz Moyer at liz.moyer@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires