Nasdaq Approves $40 Million Plan To Cover Facebook Losses

The second-biggest U.S. stock-exchange operator said in a statement today that it would pay about $13.7 million in cash with the rest of the money credited through reduced trading costs for members who suffered losses. The Securities and Exchange Commission must approve the plan, Nasdaq OMX said.

The delays and malfunctions on the Nasdaq Stock Market were the first signs of trouble in the May 18 IPO that burned investors, cost Wall Street market makers an estimated $120 million and prompted lawsuits against the company, its exchange and its underwriters. Facebook is down 32 percent since the $16 billion offering, the biggest ever by a technology company.

“We are still engaged in a review process with the SEC on this,” Eric Noll, the executive vice president for transaction services at Nasdaq OMX, said in a webcast accompanying the release. “It will be subject to change based on their position and some of their thoughts around this. It is taking a while, I think, to get everybody comfortable with it.”

The program Nasdaq announced would cover three kinds of orders placed during the IPO cross, the process used to open a stock after an offering: sales priced at $42 or less that either weren’t executed or were executed at an “inferior price,” and purchases priced at $42 that were completed without confirmations being immediately sent to investors.

Hiring IBM

“Accommodations will not be made available for losses that resulted from affirmative decisions by members, or in cases where members told investors that unconfirmed trades had been executed,” according to Nasdaq OMX’s statement today.

The exchange operator said it hired International Business Machines Corp. (IBM) to review its trading systems.

Facebook was sold by underwriters at $38 on May 17. The pricing of the first public transaction, a trade known as the IPO cross, took a half hour longer than Nasdaq OMX planned the next morning. About 30 minutes after that, the market owner reported an issue confirming trades from the opening auction with the brokerages that placed them.

Order updates and cancellations totaling 30 million shares were submitted into the auction as a technical issue was being repaired between 11:11 a.m. and 11:30 a.m. New York time, Greifeld told reporters on May 20. About half may involve “some level of dispute,” he said.

Execution Reports

Nasdaq OMX said in a May 21 notice that the 30 million shares didn’t participate in the IPO cross. An error prevented execution reports for the shares that entered the auction, as well as those that were ignored, from being disseminated immediately to brokerages, the company said.

Some orders submitted before 11:30 a.m. received executions at prices different from the $42 IPO cross, causing buyers to pay more and sellers to receive less than they should have, Nasdaq OMX said in another May 21 notice. A portion of those deemed ineligible for the IPO auction were later re-entered into the market by Nasdaq’s systems, the exchange said.

Losses may total $120 million for the four largest U.S. equity wholesalers, or market-makers that execute orders for individual investors supplied from brokers such as TD Ameritrade Holding Corp. and Charles Schwab. Nasdaq OMX plans to set aside about $13 million to reimburse member firms, pending SEC approval, Greifeld said on May 20.

Knight, Citadel

Knight Capital Group Inc. (KCG) estimated it lost as much as $35 million trading Facebook because of the malfunction, the Jersey City, New Jersey-based broker said in a May 23 SEC filing. Citadel LLC, the Chicago-based investment firm run by Ken Griffin, lost as much as $35 million on Facebook in its market- making unit, according to a person with knowledge of the firm.

UBS AG (UBSN) lost about $30 million and Citigroup Inc. (C) about $20 million from servicing retail customers through their wholesaling businesses, Dow Jones Newswires reported on May 25.

Nasdaq’s handling of the IPO has led to led to lawsuits and is being examined by the Securities and Exchange Commission. A review by the SEC that has yet to be completed shows technical failures precipitated the trading issues, not a violation of industry rules, the Wall Street Journal said May 30, citing people familiar with the matter who it didn’t name.

Nasdaq OMX Chief Executive Officer Robert Greifeld acknowledged that a “poor design” in software put the opening auction that set the price for the first traded shares into a loop that delayed its completion. Executives of the company, which operates the Nasdaq Stock Market, “believed they had the right solution” as they worked to start trading, Noll said in a statement provided by spokesman Robert Madden on May 22.

SEC officials will examine whether New York-based Nasdaq OMX took enough care setting up and testing the IPO auction, when it became aware of the breakdowns and how much it knew as they were occurring, according to Larry Harris, a professor of finance and business economics at the University of Southern California in Los Angeles and a former SEC chief economist.

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