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 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. But the damage had been done: Depending on how many of the trades exchanges nullified the bank may be on the hook for anywhere from a few million to hundreds of millions of dollars, according to estimates.
Enforcement attorneys from the US 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 got 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 IPO and Knight Capital's disastrous trading blowup last year have undermined market confidence.
Goldman has said the firm is in discussions with regulators abo-ut the options trading error and that the trading losses would not be material. Exchanges declined to provide specifics about how many trades were cancelled 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 would have been done by Wednesday, but it ca-n take longer for the bank and its customers to know the financial impact of the decisions.