We don’t really notice how much stock markets depend on computers for trading until something goes wrong. And something went wrong Tuesday at Goldman Sachs.
Call it "computer error." For about 17 minutes shortly after the market opened, data meant only for internal consumption at Goldman Sachs was sent to a different computer system that executes trades on the options market.
“What happened was the computer program mistakenly started to sell options at like one dollar an option, when in fact the market price was higher than that,” says Richard Sylla, an economics professor at New York University. “Basically, Goldman sold a lot of options cheaply. And if they have to buy them back, they will lose money because they will have to pay the market price for them.”
Options are a type of financial product known as derivatives, and they give an investor the right to buy or sell a security at a given price. Goldman Sachs says it is working with the exchanges to try to cancel some of the erroneous trades. But the investment bank could still be on the hook for losses in the millions of dollars.
This isn’t an isolated incident.
“We’ve seen a number of trading errors, both here in the U.S. as well as other markets over the course of the last...two or three years,” says Adam Sussman, a partner with the research firm TABB Group.
The most famous was the 2010 Flash Crash, when the Dow Jones Industrial Average plunged nearly 1,000 points, only to recover within minutes. Last year, a software problem nearly bankrupted Knight Capital after causing a $460 million loss. And just last week, a computer malfunction in China sent stock prices there gyrating.
All these technical kinks make NYU’s Sylla long for the old ways of trading.
“There have been -- not a lot, but still too many -- technical, electronic problems in these markets. And they suggest to me that they old system where people traded face to face, it wasn’t quite so bad,” he says.
But there’s no turning back from computer trading, says Kevin Nichols at Livevol, a company that analyzes the options market.
“We care about being able to go faster," he says. "And hit the market faster, and respond to news events faster. We definitely just have to respond, when things go wrong, faster as well.”
Responding to yesterday’s breakdown, Goldman Sachs said in a statement: "The exchanges are working to resolve the issue. Neither the risk nor potential loss is material to the financial condition of the firm."