* 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 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
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
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
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