The amendment, which follows criticism from Wall Street market makers and exchanges about the original plan, increases the compensation pool from $40 million and does away with a proposal to credit most of the money through reduced trading costs, according to a statement yesterday. Member brokers who accommodated retail customers will get paid first, according to a person familiar with the matter who asked not to be named because the discussions are private.
“We deeply regret the problems encountered during the initial public offering of Facebook,” Nasdaq OMX Chief Executive Officer Robert Greifeld said in the statement. “We failed to meet our own high standards based on our long history of providing outstanding technology to our members and exchange customers. We have learned from this experience and we will continue to improve our trading platforms.”
Delays and malfunctions on the Nasdaq Stock Market were the first signs of trouble in the May 18 Facebook initial public offering that burned investors, spurred losses on Wall Street and prompted lawsuits against the company, its exchange and the underwriters. At today’s close of $28.76, the stock remains down 24 percent from the price set by underwriters, although it has recovered from its low of $25.87 in June.
In May, Greifeld acknowledged “poor design” in software put the opening auction that set the price for the first traded shares into a loop that delayed its completion.
Public Comment
The exchange operator plans to submit the updated accommodation plan to the U.S. Securities and Exchange Commission. The public will be able to comment and the SEC must approve it before implementation. Nasdaq OMX said it expects all compensation will be provided within six months.
Among securities firms expected to seek recompense is Knight Capital Group Inc. (KCG) The Jersey City, New Jersey-based broker and market-making firm reported second-quarter earnings this week that fell 79 percent, including a loss on the Facebook IPO. Without the loss and excluding a pretax investment gain, profit would have risen 5.3 percent, the company said.
“We have been in reasonably consistent dialogue with Nasdaq,” CEO Thomas Joyce said during a July 18 conference call following the earnings report. “We’re going to be all eyes and ears waiting to watch and read and hear about what they suggest in their filing.”
Market Making
Citadel LLC, the Chicago-based investment firm run by Ken Griffin, lost as much as $35 million in its market-making unit, according to a person with knowledge of the firm.
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.
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.
IPO Cross
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.
The program Nasdaq announced on June 6 said the payment plan would cover three kinds of orders placed during the IPO cross: sales priced at $42 or less that weren’t executed; purchases priced at $42; and certain types of sell orders that should have participated in the cross and were entered into the market at 1:50 p.m. New York time on the day of the offering, receiving less than $42.
Orders eligible would only include those submitted before 11:30 a.m. New York time that were disadvantaged by Nasdaq’s technical error and those in which the member firm was uncertain of the outcome of the trade request. Orders that don’t qualify for compensation include “losses that are attributed to execution message delays when in fact an outcome was already certain,” Eric Noll, the executive vice president for transaction services at Nasdaq OMX, said in a webcast on June 6.
Nasdaq added a fourth category yesterday: orders to buy shares above $42 that firms tried to cancel and received executions in the cross will also be included, the statement said. The claims in this category will be reduced by 30 percent in calculating the trading loss, Nasdaq said.
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