DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2018059146504
TO:Nasdaq Phlx LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Goldman Sachs & Co. LLC, Respondent
Member Firm
CRD No. 361

Pursuant to Rule 9216 of Nasdaq Phlx LLC (“Phlx”) Code of Procedure, 1 Goldman Sachs & Co.
LLC (“Goldman” or the “firm” or “Respondent”) submits this Letter of Acceptance, Waiver andConsent (“AWC”) for the purpose of proposing a settlement of the alleged rule violations
described below. This AWC is submitted on the condition that, if accepted, Phlx will not bringany future actions against the firm alleging violations based on the same factual findings
described herein.
I.
ACCEPTANCE AND CONSENTA.

The firm hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of Phlx, or to which Phlx is a party, prior to a hearing and without an adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUND
Goldman has been a Phlx member since October 2010. It is a full-service broker-dealer
engaged in market making, execution services, and underwriting. The firm isheadquartered in New York, New York and has approximately 8,500 registeredindividuals among its headquarters and approximately 70 branches. Goldman does nothave any relevant disciplinary history.
SUMMARY
From October 2015, through April 2018, Goldman, through the operation of an
automated hedging logic for its Synthetic Product Group (“SPG”), mismarked as “long”
approximately 60 million short sale orders totaling more than 14 billion shares. Nearlyeight million of those orders, totaling more than a billion shares, were executed. Due tothe inaccurate “long” mark, 12,335 of the executed orders were executed at or below theThe Nasdaq Stock Market LLC Rules General 5 Section 9000 et. al. are incorporated by reference into Phlx Rule
General 5, Section 3, and are thus Phlx Rules and thereby applicable to Phlx members, member organizations,persons associated with member organizations, and other persons subject to the Exchange’s jurisdiction.

1DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9national best bid while a short sale circuit breaker was in effect. These mismarked orders
also caused the firm to maintain inaccurate books and records.
FACTS AND VIOLATIVE CONDUCT
1.

This matter originated from a FINRA examination.

Goldman erroneously marked and routed certain sell orders.

2
3

2.

Rule 200(g) of Regulation SHO of the Securities Exchange Act of 1934(“Exchange Act”) requires broker-dealers to “mark all sell orders of any
equity security as ‘long,’ ‘short,’ or ‘short exempt.’” The broker-dealer
selling an equity security may mark an order as “long” only if it is deemed toown the security being sold and either (i) the security to be delivered is in thephysical possession or control of the broker or dealer; or (ii) it is reasonably
expected that the security will be in the physical possession or control of thebroker or dealer no later than the settlement of the transaction. A violation ofRule 200(g) also constitutes a violation of Phlx Rule 707.

3.

PSX Rule 3301A(a) provides that “[p]articipants may express their tradinginterest in PSX by entering Orders. PSX offers a range of Order Types thatbehave in the manner specified for each particular Order Type. Each OrderType may be assigned certain Order Attributes that further define its behavior.
All Order Types and Order Attributes operate in a manner that is reasonably
designed to comply with the requirements of Rules 610 and 611 under
Regulation NMS. Each Order must designate whether it is to effect a buy, along sale, a short sale, or an exempt short sale.” 2

4.

Phlx Rule 707 (through PSX Rule 3202) provides that “[e]very member,member organization, or person associated with or employed by a member ormember organization shall not engage in conduct inconsistent with just andequitable principles of trade.” 3

5.

PSX Rule 3202 provides that certain Phlx Rules shall be applicable to market
participants trading on PSX, including Rule 707, Rule 748, and Rule 760.

6.

From October 2015 through April 2018, Goldman mismarked 59,981,252
short sell orders as long, of which 1,365,337 were sent to PSX. These orders
represented less than one percent of Goldman’s total principal sell orders
during this time period. The orders were auto-generated to promptly hedge
SPG’s synthetic risk exposure resulting from its execution of equity swap
transactions with clients. The mismarked orders were caused by Goldman’s
implementation of an upgrade to the relevant automated trading software thatwas intended to simplify this order flow. Goldman inadvertently failed toAs of January 22, 2021, PSX Rule 3301A(a) was renumbered to Phlx Rule Equity 4, Section 3301A(a).
As of January 22, 2021, Phlx Rule 707 was renumbered to Phlx Rule General 9, Section 1(c).

DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9

include a single line of code that was designed to copy the long or short markfrom a parent sell order and affix it to the instantaneously created child sellorder(s) that were routed to the market. While the parent orders wereaccurately marked as short sales and a locate was obtained for each, the childorders did not receive the short sale order mark of the parent order due to themissing line of code. The firm immediately fixed this coding error after being
notified by FINRA in April 2018.
7.

Separately, Goldman misapplied order marking logic to sell orders routed to
the firm by a foreign affiliate in a manner that resulted in certain of thoseorders being inaccurately marked short. A sample of six months of data
revealed that approximately 670 orders of that foreign affiliate were broken up
into child orders and sent to various market centers with the incorrect shortsale indicator, including 964 sent to PSX, resulting in 26,377 executions. 4
Goldman corrected this error after being notified by FINRA in October 2019.

8.

By marking short sell orders as long, Goldman violated Regulation SHO Rule200(g) and PSX Rule 3301A(a) and Phlx Rule 707 (through PSX Rule 3202).

9.

By marking short sell orders as long, Goldman also violated Section 17(a) of
the Exchange Act and Rule 17a-3 thereunder, and Phlx Rule 760 relating tomaintaining accurate order memoranda.

10.

Section 17(a) of the Exchange Act and Rule 17a-3(a)(7)(i) thereunder require
broker-dealers to make and keep current memoranda for trade executions that
include the terms and conditions of the order. Implicit in these provisions is
the requirement that such memoranda be accurate.

11.

Phlx Rule 760 (through PSX Rule 3202) provides that “[e]very member andmember organization shall make, keep current and preserve such books andrecords as the Exchange may prescribe and as may be prescribed by theSecurities Exchange Act of 1934 and the rules and regulations thereunder. No
member or member organization shall refuse to make available to theExchange such books, records or other information as may be called for under
the rules or as may be requested in connection with an investigation by theExchange.”

12.

Goldman mismarked and routed 59,981,252 short sale orders as long;
1,365,337 of those orders were sent to Phlx. Of those 59,981,252 orders,7,866,996 were executed, including 243,765 executed on Phlx. The firm
maintained inaccurate memoranda with respect to the correct short sale ordermarking for each of the 7,866,996 sales.

4 The sample data set was drawn from the time period January 2018 through June 2019.

DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA913.

As a result, Goldman violated Section 17(a) of the Exchange Act and Rule17a-3(a)(7)(i) thereunder, and Phlx Rules 760 and 707 (through PSX Rule3202).

Goldman failed to establish and maintain a supervisory system reasonably designed
to comply with Rule 200(g) and Phlx rules relating to accurate order memoranda.

514.

Phlx Rule 748(h) (through PSX Rule 3202) provides that “[e]ach member ormember organization shall establish, maintain, and enforce written
supervisory procedures, and a system for applying such procedures, tosupervise the types of business(es) in which the member or member
organization engages in and to supervise the activities of all registeredrepresentatives, employees, and associated persons. The written supervisory
procedures and the system for applying such procedures shall reasonably bedesigned to prevent and detect, insofar as practicable, violations of theapplicable securities laws and regulations, including the By-Laws and Rulesof the Exchange.” 515.

Goldman failed to establish and maintain a supervisory system reasonably
designed to achieve compliance with Rule 200(g) and rules relating toaccurate order memoranda. Although Goldman had a report that wasdesigned to surveil for order marking accuracy, that report reviewed theaccuracy of the order marks of parent orders, but did not confirm that theproper marking of the parent order carried over to the child orders. This
deficiency resulted in Goldman’s failure to detect that it had mismarked
approximately 60 million short sale orders as long, 1,365,337 of which wererouted to Phlx, during an approximately 29-month period and the execution of
12,355 short sale transactions for 1,596,375 shares at or below the national
best bid while a short sale circuit breaker was in effect. It also resulted inGoldman creating and maintaining over seven million inaccurate ordermemoranda.

16.

In May 2019, Goldman enhanced its order marking surveillance report tocapture child orders as well as parent orders. In September 2019, the firm also
added an additional control designed to detect and prevent the routing of
inaccurately marked short sale orders (i.e., orders marked long that should bemarked short).

17.

By failing to have supervisory reviews reasonably designed to ensure themismarked orders were appropriately marked long or short consistent withRegulation SHO and order marking and books and records requirements,
Goldman violated Phlx Rules 748(h) and 707 (through PSX Rule 3202).

As of February 3, 2020, Phlx Rule 748 was renumbered to Phlx Rule General 9, Section 20.

DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9B.

Respondent also consents to the imposition of the following sanctions:A censure, and a $87,100 fine (resolved simultaneously with similar matters fora total fine of $3,000,000). 6
Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction imposed in this matter.
Respondent agrees to pay the monetary sanction upon notice that this AWC has been
accepted and that such payment is due and payable. Respondent has submitted a
Payment Information form showing the method by which it proposes to pay the fine
imposed.
The sanctions imposed herein shall be effective on a date set by FINRA staff.
II.
WAIVER OF PROCEDURAL RIGHTS

Respondent specifically and voluntarily waives the following rights granted under Phlx’s Codeof Procedure:A.

To have a Formal Complaint issued specifying the allegations against the firm;B.

To be notified of the Formal Complaint and have the opportunity to answer theallegations in writing;C.

To defend against the allegations in a disciplinary hearing before a hearing panel,to have a written record of the hearing made and to have a written decision issued;
andD.

To appeal any such decision to the Exchange Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgmentof the Chief Regulatory Officer, the Exchange Review Council, or any member of the Exchange
Review Council, in connection with such person’s or body’s participation in discussions
regarding the terms and conditions of this AWC, or other consideration of this AWC, including
acceptance or rejection of this AWC.
Respondent further specifically and voluntarily waives any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,The balance of the fine will be allocated to Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange, Inc., Investors Exchange LLC, The Nasdaq Stock Market LLC, Nasdaq
BX, Inc., New York Stock Exchange LLC, NYSE Arca, Inc., NYSE American LLC, and FINRA.

6

DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9in connection with such person’s or body’s participation in discussions regarding the terms andconditions of this AWC, or other consideration of this AWC, including its acceptance orrejection.
III.
OTHER MATTERS
Respondent understands that:A.

Submission of this AWC is voluntary and will not resolve this matter unless anduntil it has been reviewed and accepted by FINRA’s Department of Enforcement
and the Exchange Review Council, the Review Subcommittee, or the Office ofDisciplinary Affairs (“ODA”), pursuant to Phlx Rule 9216;

B.

If this AWC is not accepted, its submission will not be used as evidence to prove
any of the allegations against the Respondent; andC.

If accepted:

D.

1.

This AWC will become part of the Respondent’s permanent disciplinary
record and may be considered in any future actions brought by Phlx or any
other regulator against the Respondent;

2.

Phlx may release this AWC or make a public announcement concerning
this agreement and the subject matter thereof in accordance with Phlx
Rule 8310 and IM-8310-3; 7 and3.

Respondent may not take any action or make or permit to be made any
public statement, including in regulatory filings or otherwise, denying,directly or indirectly, any finding in this AWC or create the impressionthat the AWC is without factual basis. Respondent may not take any
position in any proceeding brought by or on behalf of Phlx, or to which
Phlx is a party, that is inconsistent with any part of this AWC. Nothing inthis provision affects the Respondent’s right to take legal or factual
positions in litigation or other legal proceedings in which Phlx is not aparty.

Respondent may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
Respondent understands that it may not deny the charges or make any statementthat is inconsistent with the AWC in this Statement. This Statement does notconstitute factual or legal findings by Phlx, nor does it reflect the views of Phlx orits staff.

Phlx Rule 8310 and IM-8310-3 are now found at Nasdaq Rule General 5 Sections 8310 and IM-8310-3 and areincorporated by reference into Phlx Rule General 5, Section 2.
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DocuSign Envelope ID: 3768AC25-CEED-461C-B281-4BFEA1AECEA9

The undersigned, on behalf of the firm, certifies that a person duly authorized to act on its behalf
has read and understands all of the provisions of this AWC and has been given a full opportunity
to ask questions about it; that the firm has agreed to the AWC’s provisions voluntarily; and that
no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and theprospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it.
April 3, 2023____________________
Date

Goldman Sachs & Co. LLC,Respondent
By: ____________________________
Name: David Markowitz
Title: Global Co-Head of Litigation andRegulatory Proceedings

Reviewed by:_______________________
James Brigagliano_______________________
Kevin J. Campion
Sidley Austin LLP
1501 K Street N.W.
Washington, D.C. 20005(202) 736-8000
Counsel for Respondent
Accepted by Phlx:
April 4, 2023_________________
Date____________________________________
Steven M. Tanner
Senior Counsel
Department of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA