Goldman, Sachs & Co. ("GSCO"), a NYSE member organization and a wholly-owned subsidiary of The Goldman Sachs Group, Inc., was charged by NYSE-Regulation with having violated NYSE Rule 342 in its capacity as a NYSE Supplemental Liquidity Provider ("SLP").  The firm's Quant Cash Desk - the proprietary algo trading desk - conducts the Firm's SLP business on the NYSE. NYSE Regulation's Division of Market Surveillance - nka the NY Equities ("NYE") Section of Market Surveillance - conducted the investigation into activities by GSCO that transpired between January 2009 and at least September 2011 (the"Relevant Period").  The hearing was conducted by FINRA on behalf of NYSE Regulation. NYSE Findings and Allegations. When participating in the NYSE’s SLP program, GSCO provided liquidity in its assigned securities by electronically entering resting orders into the systems and facilities of the NYSE.  As an SLP, the Firm received a rebate or credit from the NYSE for providing liquidity to the NYSE Market. No rebate was received for taking liquidity from the NYSE Market. GSCO conducted the SLP business through the Quant Cash Desk, that used 25 separate algorithmic trading strategies ("algos") that functioned independently of each other.  These algos did not coordinate their order placement decisions - i.e., each algo placed or cancelled orders based on its own business logic irrespective of any other algo’s order placement or cancellation decisions). By not taking into account the other algos' activities, the trading logic for each respective algo was not capable of factoring in unexpected SLP orders sent by other algos within the unit. The sole supervisor for the SLP business, including each of the algos, was the “Quant Cash Supervisor.”  During the Relevant Period, some 250,000 SLP orders entered by Quant Cash resulted in executions against other SLP Orders entered by Quant Cash. That represented less than 1% of all Quant Cash executed trades. Existing Internal Controls, Supervisory Resources. At the beginning of the relevant period, the Firm’s relied on a daily report regarding potential instances in which SLP orders executed against other SLP orders on the NYSE and other exchanges - it was reviewed on a post-trade basis by the Quant Cash Supervisor. Between 4/15/10 and 5/26/11, the Firm developed 2 additional reports to identify potential wash trades involving Quant Cash SLP orders on the NYSE and other exchanges on a post-trade basis.  The Quant Cash Supervisor reviewed these reports as well. In October 2010, the Firm implemented a surveillance report to identify potential wash trades on the NYSE and other exchanges on a post-trade basis.  It was used to surveil the activity of a number of GSCO business units, including Quant Cash, and was reviewed by the Firm’s Compliance Department.  If a trade involving Quant Cash SLP orders generated an alert on one of these reports, a review of the facts and circumstances surrounding the alert was required, in order to determine whether the alert suggested an issue that warranted further inquiry.

However, according to NYSE Regulation, the reports utilized during the Relevant Period were not capable of reasonably detecting and/or preventing potentially violative SLP trades entered by Quant Cash.  For example, the Firm had one report which only generated alerts when trades involving Quant Cash SLP orders occurred within one second of each other and accounted for greater than 1% of the day’s trading volume in the relevant security.  This led to the potentiality that the firm would not capture and conduct further reviews of a the majority of SLP orders which were executed against other SLP orders.

In May 2011, Quant Cash began to utilize the DBK Link Identifier in the programming logic of one of its reports - a numerical identifier that allows an SLP firm to definitively determine the contra party to its trades on the NYSE.  By matching the same DBK Link Identifier on both the buy and sell side of SLP transactions, a SLP firm can detect trades where a SLP buy order and a SLP sell order were executed against each other.  The NYSE had provided the DBK Link Identifier during the entire period in question. However, because GSCO was unaware of the nature and potential use of this identifier until around May 2011, its reports merely estimated which SLP orders may have been executed against each other on the NYSE - rather than identifying these transactions with certainty.  Once GSCO became aware of the nature of the DBK Link Identifier, it began using this information in one of its reports to identify transactions for review. [ by Howard Haykin ] Sanctions Imposed, and Relevant Factors. In determining applicable sanctions, NYSE Market Reg took into consideration that, in January 2012, GSCO implemented technological controls in the systems used by Quant Cash that the Firm has represented are reasonably designed to monitor SLP orders generated by Quant Cash to prevent routing to the NYSE a Quant Cash SLP order that could execute against another Quant Cash SLP order resting on the opposite side of the market. The Firm also represented that it intends to utilize the self-trade prevention functionality to be offered by the NYSE, once it becomes available. Goldman agreed to pay the $85K penalty that the Hearing Officer imposed. For further details, go to:   [NYSE Hearing Bd Decision 12-NYSE-3; FINRA Proceeding #20110270394, 4/4/12 (posted 5/23/12)].