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Risk Management

10:43 AM
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Why Is Goldman Sachs Having Trading Glitches?

Even an investment powerhouse that is awash in cash, smart people, and presumed state-of-the-art IT can experience a spectacular trading error. But why are they even happening?

Just because it’s August and it feels like everyone is on vacation it doesn’t mean that disaster cannot rear its ugly head.

On a glorious summer day, Goldman Sachs suffered a trading error that could cost the respected and reviled investment firm up to $100 million once the scope of the snafu is revealed. And of course, this fee doesn’t include any fines that might arise once the regulators look into the trading mess.

Here are the details: Goldmans’ electronic trading systems sent out erroneous single stock and ETF options trades to a host of American exchanges yesterday morning. Those exchanges include NYSE Euronext, CBOE, and Nasdaq OMX. Representatives from those exchanges told the Wall Street Journal that those trades would be "busted up" by the end of yesterday's trading and into this week.

[Moneybrawl: Michael Lewis takes on Goldman Sachs and the sorry state of its HFT.]

"The botched trades occurred when Goldman's internal computer system that helps to determine where to price options mistakenly ended up sending orders at errant prices. Goldman is a market maker in the options market," writes CNBC.

Goldman Sachs is not alone when it comes to trading errors. Last week, Chinese brokerage Everbright Securities experienced a surprise Flash Surge when trading volumes soared more than 50 percent in a single trading session. This time last year, Knight Capital suffered a devastating Flash Crash when a trading algo went haywire. The respected and tech-savvy Knight Capital could not absorb the resulting $460 million trading loss and eventually saw itself being split up and sold off to the highest bidders.

Of course, a potential $100 million loss won't cripple the flush Goldman Sachs, which is measured as the fifth largest bank in the US by assets. But yesterday's trading glitch begs a tough question: Why are these trading glitches happening?

Goldman Sachs has been the punching bag for Wall Street before the credit collapse of 2008 and animosity towards the Wall Street firm has only grown. But despite its expertise in hiring smart traders and MDs, its ambitious deals and intense pursuit of profits, even a firm like Goldman Sachs cannot escape the dreaded phrase, "It appears to be a trading glitch."

Today's electronic trading has become so fast, smart and automated that when an error occurs, it's often a big, embarrassing one. Look no further than Nasdaq's 2010 faceplant on the botched Facebook's IPO or BATS' systems failing during its very own IPO. In both cases, two tech-savvy firms with stellar IT saw their systems fail when they were needed the most.

[Can Golvis break the Goldman Sachs Hedge Fund Curse?]

According to news reports, Goldman's glitch does not appear to have been caused by a brand new trading system or trading algorithm that mistook options interests for actual orders. (Details of the glitch will come out in the following weeks and months.)

While electronic trading was supposed to eradicate human errors from fat finger mistakes to misheard orders and illegible handwriting on tickets, the new systems have their own share of vulnerabilities. Imagine the minute errors that we don’t hear about.

But these trading glitches might be the price for high-speed trading. As one trader on the CBOE told Investor's Business Daily, "It shows you the current status quo: The avant-garde technology is ahead of exchange systems."

In other words, last year it was Knight Capital and this time it was Goldman Sachs. Who will have the next trading glitch?

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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