Nasdaq has offered $40 million to compensate brokerages for the botched… (Carolyn Cole, Los Angeles…)
NEW YORK — Nasdaq OMX Group Inc.'s proposed $40-million fund to repay brokerages that lost money during the botched Facebook IPO may not be all the exchange operator winds up paying for the debacle.
The exchange came under attack shortly after it announced a plan to use cash and credits to assuage investors angry over the social networking giant's fumbled debut May 18. The initial public offering was delayed for two hours and was followed by widespread confusion over whether trades had gotten through.
Knight Capital, one of Wall Street's largest trading firms, blasted the compensation as paltry and hinted it might take legal action. The operator of rival New York Stock Exchange also vowed to fight the Nasdaq plan, saying it could unfairly siphon away business.
The criticism intensified Wednesday as Nasdaq Chief Executive Robert Greifeld embarked on an apology tour with the financial press, saying the IPO was a low point and an embarrassment for the exchange.
In addition to facing anger from Wall Street, Nasdaq is facing inquiries by regulators over what went wrong.
The Securities and Exchange Commission is gathering information in an inquiry that involves staff from its enforcement, markets and trading, and other divisions, according to a person familiar with the matter who was not authorized to speak.
"We continue to review the matter and have drawn no conclusions," SEC spokesman John Nester said, declining to elaborate.
Regulators would have to approve Nasdaq's plan for the $40-million "voluntary accommodations fund" it announced Wednesday. The fund would include $13.7 million in cash, with the rest coming from trading discounts.
Nasdaq's glitches may have cost brokerages more than $100 million, according to some estimates, so the exchange's plan could leave some firms unhappy.
"I'm not sure they're going to settle for 30 cents on the dollar," said Larry Tabb, chief executive of Tabb Group, a consulting and research firm.
Knight Capital Group in Jersey City, N.J., has said it alone lost as much as
$35 million in the Facebook trading mess.
Calling Nasdaq's plan "simply unacceptable," the firm said the proposal "does not come close to covering reported losses from broker-dealers like Knight who traded Facebook shares on behalf of average investors."
Knight added in a statement that it is "evaluating all remedies available under law."
NYSE Euronext, which runs the NYSE, complained that Nasdaq's plan would undercut its business by offering trading discounts.
"This is tantamount to forcing the industry to subsidize Nasdaq's missteps and would establish a harmful precedent that could have far-reaching implications for the markets, investors and the public interest," NYSE Euronext said in a statement.
Nasdaq did not respond to requests for comment.
Even if Nasdaq's plan wins approval, it's unclear how much of that $40 million would trickle down to retail investors, many of whom grew frustrated not knowing whether their buy and sell orders went through on Facebook's first day of trading.
Retail brokerage Fidelity Investments said it had resolved a "large number" of customer disputes. But in light of Nasdaq's plan, Fidelity is "working closely with market makers and others to clarify what additional resolution, if any, might be available for our customers," a spokesman said.
Not everyone would be accepted under Nasdaq's fund. Eligible orders would include sell orders priced at $42 or less that did not execute or were executed at an inferior price, and buy orders priced at $42 that were executed but not immediately confirmed, Nasdaq said in a statement.
Nasdaq also announced that it had tapped IBM to conduct a "thorough review of the current state of processes for designing, developing, testing, deploying and operating market systems."
The glitches appear to stem from the exchange's IPO cross, a system that pairs buyers and sellers when stocks make their market debut. High volume in Facebook's trading overwhelmed the system and delayed investors' trade confirmations, according to the source familiar with the matter.
The exchange faces more than regulatory scrutiny over the glitches — and that may also be costly. Nasdaq is already the target of legal action filed on behalf of investors, including one seeking class-action status in federal court in Manhattan.
"The penalties that Nasdaq is going through [are] certainly enough to make sure that this doesn't happen again and that other people don't follow suit," Tabb said.