Apparent software error triggers erroneous options trades

Apparent software error triggers erroneous options trades

on Aug 26, 13 • by Chris Bubinas • with No Comments

A series of mistaken orders issued by Goldman Sachs recently led to turmoil on several U.S. stock-options exchanges. The exchanges were forced to review the orders, which lowered some stock-option prices to $1 shortly after the market opened on Tuesday, August 20, the Wall Street Journal reported...

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A series of mistaken orders issued by Goldman Sachs recently led to turmoil on several U.S. stock-options exchanges. The exchanges were forced to review the orders, which lowered some stock-option prices to $1 shortly after the market opened on Tuesday, August 20, the Wall Street Journal reported. If the trades are ultimately honored, Goldman Sachs could stand to lose as much as $100 million, sources told the Financial Times.

The erroneous trades appear to have resulted from a glitch in a system Goldman uses to take expressions of client interest, an insider told the Financial Times. The expressions of interest were mistakenly sent as orders to exchanges, in many cases with default stand-in prices different from those actually on the market. The orders were placed for options on securities with ticker symbols beginning with the letters H, I, J, K and L in the first 17 minutes of trading on the NYSE Amex Options market.

NYSE Euronext released an alert saying it was reviewing all potentially affected transactions. The Chicago Board Options Exchange and Nasdaq OMX temporarily stopped accepting quotes from NYSE Amex and said it was also reviewing transactions that took place early in the day. NYSE said that it expected most of the trades to be canceled, and a spokesman told the Financial Times that the exchange itself did not have any system issues.

“The exchanges are working to resolve the issue,” a Goldman spokesman said. “Neither the risk nor the potential loss is material to the financial condition of the firm.”

Ongoing market concerns
Whether the error ultimately results in losses for Goldman or not, it underscores the increasingly volatile nature of today’s highly automated markets and trading processes, several experts noted. In addition to potentially incurring losses for Goldman Sachs, this latest event could leave ripples throughout the market, Larry Weiss, head of U.S. execution trading at Instinet, told Reuters.

“Any time that an exchange decides to cancel trades, people are at risk,” he explained.

Similar errors have resulted in multiple market closures and financial losses in the last two years. A glitch on the Nasdaq market during Facebook’s IPO was blamed for widespread financial consequences and resulted in a $10 million fine for the exchange, while a trading algorithm error at Knight Capital last summer led to more than $440 million in losses.

Organizations can reduce the likelihood of errors in automated trading systems by instituting more rigorous safeguards during the development process. Using tools such as static analysis software, companies can identify potential weak points and catch bugs before they are released. By spending some additional resources in a source code analysis or code review initiative, businesses can save substantially by avoiding losses down the line.

Software news brought to you by Klocwork Inc., dedicated to helping software developers create better code with every keystroke.

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