Goldman Sachs, the renowned multinational investment bank, has been fined $3m by the Financial Industry Regulatory Authority (FINRA) for mismarking 60 million short sale orders totalling over 14 billion shares between October 2015 and April 2018. The error arose after Goldman failed to add one line of computer code when it upgraded its automated trading software. Nearly eight million of those orders, numbering over a billion shares, were executed.
According to the details, some 12,335 executed orders were carried out at or below the best displayed price while a short sale circuit breaker was active. It means that the execution or display of short sale in that security was prohibited. The inaccurately marked orders were used to hedge Goldman’s Synthetic Product Group’s synthetic risk exposure resulting from its execution of equity swap transactions with clients.
The FINRA disclosed that the inaccurately marked orders occurred due to a coding error in the implementation of the new system. The report stated that the coding error occurred because the new system omitted a necessary function, and it relied on other processes to detect and mark short sales.
Following on from the fine, Matthew Solomon, Goldman’s chief counsel, commented that the bank is committed to retesting its systems regularly and enhancing its controls. The firm has already replaced the faulty code and implemented measures to increase the surveillance of short sale orders.
Goldman Sachs is one of the biggest names in investment banking globally, with a reported 35,000 employees worldwide as of December 2021. However, the bank has faced intense scrutiny in recent years, with many critics accusing it of exploiting its size and economic power to the detriment of its clients and the industry.
This incident should serve as a warning to both Goldman Sachs and the wider finance industry that even the slightest of errors can be costly. The regulatory authorities are keeping a keen eye on the industry, and violators will be held accountable for their misconduct. While this penalty is relatively small compared to the overall wealth of Goldman Sachs, other financial institutions should note that it is not just the financial implications that matter, but the reputational damage that such incidents can cause.
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