UPDATE 1-Goldman assessing fallout from options trading glitch
* Options trading glitch could cost bank millions-sources
* SEC enforcement staff looking into what caused problems
* Upgrade of internal inventory system led to bad trades
By Lauren Tara LaCapra and Doris Frankel
NEW YORK/CHICAGO, Aug 21 (Reuters) - Goldman Sachs Group Inc is assessing the financial damage caused by a trading glitch that led to a flood of erroneous options trades, as U.S. regulators began looking into what caused the problem.
On Tuesday morning, an upgrade of an internal Goldman system affected options on stocks and some exchange-traded funds with listing symbols beginning with the letters H through L.
The system, called a "trading axis," monitors the Wall Street bank's inventory to determine whether it should be a more aggressive buyer or seller in the market. But a technical error misinterpreted non-binding indications of interest, or IOIs, as firm bids and offers, leading to some trades that were vastly out of line with where market prices were, a source familiar with the matter said.
Goldman quickly identified the problem and contained it, said the source, who spoke on the condition of anonymity. But by then the damage had been done: Depending on how many of the trades exchanges nullified - or "busted" - the bank may be on the hook for anywhere from a few million to hundreds of millions of dollars, according to estimates from traders and analysts.
Enforcement attorneys from the U.S. Securities and Exchange Commission are trying to determine whether any rules were violated related to the glitch, the source said on Wednesday.
The agency has gotten more aggressive about probing technical issues at brokers and exchanges in recent years, as a flurry of high-profile glitches ranging from the "flash crash" in 2010 to errors related to the Facebook Inc IPO and Knight Capital's disastrous trading blowup last year have undermined market confidence.
An SEC spokeswoman declined to comment. Goldman has said that the firm is in discussions with regulators about the options trading error and that the trading losses would not be material.
Exchanges declined to provide specifics about how many trades were canceled or the financial implications of their reviews for Goldman and other brokers.
Either Goldman or its trading partners could have contested the veracity of options trades and appealed decisions made by the exchanges. All of that activity would have been done by Wednesday, but it could take longer for the bank and its customers to know the financial impact of the decisions.
Exchanges have their own rules for the appeal process. Exchanges will typically delete a price that is wildly out of range, but as it gets closer to the bid-ask quotes, it becomes less certain the exchange will cancel it.
NYSE Euronext said it had completed a review of the erroneous trades on its two option venues NYSE Amex Options and NYSE Arca on Tuesday and on Wednesday morning. Its customers had until 9:30 a.m. EDT on Wednesday to appeal the decisions made by the exchange operator, NYSE Euronext said in a trader notice on Wednesday.
NYSE Amex options exchange said "it may be some time" before participants know that voided positions in some of those trades are in the records of the OCC, which clears all listed options trades.
Exchange operator CBOE Holdings Inc said it had completed its review of specific trades that took place on Tuesday from 8:30 a.m. to 8:41 a.m. CDT on the Chicago Board Options Exchange and the C2 options market. CBOE said the affected parties have been notified. No other details were given on a notice on its website.
Nasdaq OMX Group declined to comment.
Some of the options trading in question also occurred on ISE, according to an ISE spokeswoman, who declined to provide more details.
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