A YEAR after Goldman Sachs bungled a software upgrade and lost tens of millions of dollars from unintended trades, the 12 U.S. stock options exchanges have crafted new rules for dealing with erroneous transactions, according to draft documents seen by Reuters.

    Under the proposed rules, unintended trades placed by professional traders will usually have their prices adjusted to levels as close to their fair market value as possible, while wrong trades by retail customers will mainly be undone, five sources with knowledge of the matter told Reuters.

    The rules are meant to protect investors from algorithms gone wild and other sources of market turmoil. Regulators and exchange operators across equities, commodities and other markets have been taking steps to prevent mistaken trades from spiraling into collapses, a rising concern as trading grows increasingly automated.

    When market prices are oscillating wildly, technical glitches can create turmoil, said Andy Nybo, head of derivatives research at advisory firm TABB Group.

    “A cohesive solution for the industry is critical to get in place before we have another technology blowup,” he said.

    In other markets, technical glitches have created big trouble for traders. Knight Capital Group, a stock trading firm now known as KCG Holdings Inc., lost US$461.1 million in August 2012 from new software that was improperly installed. The loss forced the company to seek US$400 million of rescue capital and eventually led to its sale to a rival firm.

    But critics say the new stock-option trading rules are hardly perfect. Participants often don’t know whether they are trading with a professional or a retail investor. If markets start surging or plunging unexpectedly, traders have no way of knowing if their positions will disappear or be adjusted.

    That uncertainty could result in many traders exiting a choppy market just when they are most needed, said Thomas Peterffy, founder and head of Interactive Brokers, a brokerage and options market maker.

    “All of the liquidity goes out of the marketplace and then it will never recover,” he said. Although listed stock options markets are a fraction of the size of U.S. equities market, derivatives exchanges are seen as a crucial tool for dealers and other market participants to offload risk from the stock market.

    Exchanges have been fine-tuning the plan with the help of the SEC since June, and expect to file it with the regulator in four to six weeks, according to one of the people. (SD-Agencies)