After nearly eight years, regulators have disciplined one of the industry's biggest firms for a rules violation that involved millions of short sale trades.
The Financial Industry Regulatory Authority posted a letter of acceptance, waiver and consent
Around $1.15 million of those fines will be paid to FINRA, the letter said. Goldman Sachs also received a censure from the agency.
The sales in question dated from October 2015 to April 2018 and involved over 14 billion shares. Almost 8 million mismarked orders were executed, affecting over 1 billion shares.
"Due to the inaccurate "long" mark, 12,335 of the executed orders were executed at or below the national best bid while a short sale circuit breaker was in effect," FINRA said of Goldman's errors in the letter, adding that the issue had been identified during "a FINRA examination."
"These mismarked orders also caused the firm to submit inaccurate trade reports to FINRA and maintain inaccurate books and records."
When a trading order is marked "long," it means the buyer intends to buy and own the stock. Under that arrangement, the trader hopes the stock will grow in value to later be sold for a profit.
By contrast, an order to "short" a stock
In its filing, FINRA noted that the cause of the problem appeared to be a coding error from a trading software upgrade at the time and said Goldman immediately fixed the error in April 2018, after it had been notified of the mistake.
"The mismarked orders were caused by Goldman's implementation of an upgrade to the relevant automated trading software that was intended to simplify this order flow. Goldman inadvertently failed to include a single line of code," FINRA said. The missing code caused short sell "parent" orders that were initially created and sent out correctly marked to be routed to the market as "child" orders missing those short marks.
However, FINRA added that Goldman had failed to maintain supervisory and regulatory systems that should have caught the mistake.
By September 2019, Goldman had added additional controls to catch those mistakes, FINRA said in the letter. But in October 2019, FINRA noted that it had informed Goldman of a separate error involving mismarked short sale orders — although that, too, it said Goldman had immediately fixed.
Bill Singer, a securities lawyer who is the author of industry blog Broke and Broker and a former FINRA attorney, said in an interview that he believed FINRA had bungled its handling of the case in many respects.
For one thing, the fine of $3 million appeared to be "modest" for the offense and player involved, Singer said, and didn't involve disciplining or suspending any individual at the firm.
"This really comes off not even as a slap on the wrist. [It] just comes like being whipped with a wet noodle," Singer said of the fines. "Goldman Sachs put through 60 million orders that were wrong… this is not a minor thing."
It's also unusual for such a case to drag out so long for just a settlement, Singer said, noting that two to three years would have been more appropriate.
"If FINRA knew in 2018 that GS was noncompliant, which was in the AWC, how is it that we're here five years later, and they're only getting to a settlement?" Singer said.
This delay may suggest an inability on FINRA's part to adequately police big broker-dealer firms, Singer said.
"One of the biggest brokerage firms in the world was involved in short sell errors, and it took the regulatory community four years to settle the case. I mean, this has essentially been going on for almost eight years."
Singer also took issue with the FINRA letter's presentation of the problem as due to a seemingly minor error in code.
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FINRA and Goldman Sachs declined to comment.
