Nasdaq Boosts Payout Pool in Facebook IPO to $62 Million Cash

Nasdaq OMX Group Inc. (NDAQ), second- biggest U.S. stock exchange owner, revamped its proposal to compensate brokers that lost money in the public debut of Facebook Inc. (FB), boosting the payout to $62 million cash.

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.

S&P 500 Has First Back-to-Back Weekly Gain Since June

U.S. stocks rose this week, with the Standard & Poor’s 500 Index posting its first back-to-back gains since June, as earnings from International Business Machines Corp. (IBM) to Baker Hughes Inc. beat estimates and Federal Reserve Chairman Ben S. Bernanke said he’s prepared to add stimulus.

The benchmark index snapped a three-day rally today amid concern Europe’s crisis is intensifying. Baker Hughes surged 16 percent this week to lead energy shares to the biggest gain among the 10 S&P 500 industry groups. Technology stocks rose 1.9 percent as IBM climbed 3.5 percent and EBay Inc. (EBAY) jumped 12 percent amid better-than-expected earnings. Financial companies had the biggest retreat after Bank of America Corp. (BAC) and Morgan Stanley (MS) sank more than 9 percent amid disappointing results.

The S&P 500 added 0.4 percent to 1,362.66 during the week, extending its gain for the year to 8.4 percent. The Dow Jones Industrial Average climbed 45.48 points, or 0.4 percent, to 12,822.57, the biggest weekly gain since June 29.

“There is this euphoria that maybe things are starting to turn around,” Linda Bakhshian, a money manager with Federated Investors in Pittsburgh, said in an interview this week. Her firm oversees $363.6 billion. “Expectations were pulled back. Companies are beating and the market is happy again because things are not that bad.”

Optimism about corporate earnings and monetary stimulus has sent the S&P 500 up 6.6 percent from a low on June 1. Profits (SPX) have exceeded analyst forecasts at about 73 percent of the 118 S&P 500 companies that have reported quarterly results so far, according to data compiled by Bloomberg. Apple Inc., Exxon Mobil Corp. and about 170 other S&P 500 companies are scheduled to announce earnings next week.
Earnings Projections

Analysts ratcheted down their projections for second- quarter profits at the start of earnings season, forecasting a decrease of 2.1 percent, compared with an increase of 4.4 percent at the beginning of this year, data compiled by Bloomberg show. By the end of this week, their outlook improved and they now estimate a 1.6 percent decline.

Stocks rose early in the week after Bernanke told senators that the central bank is prepared to act to boost growth if the labor market doesn’t improve. Disappointing data added to evidence the world’s largest economy is slowing, with reports showing that retail sales unexpectedly slid, manufacturing in the Philadelphia region contracted for a third month, claims for unemployment benefits rose and an index of leading economic indicators declined more than forecast.
‘Boost Growth’

“The assumption is that the Fed is going to continue to try to do what it can to boost growth, or at least continue conditions that could give it a chance,” Dean Gulis, who oversees about $3.5 billion as a fund manager at Loomis Sayles & Co. in Bloomfield Hills, Michigan, said in a telephone interview this week.

Europe’s debt crisis and concern about a global economic slowdown continued to loom over the markets. The S&P 500 fell 1 percent from a two-month high today after Spain said the recession will extend into next year and the region of Valencia prepared to seek a rescue from the central government. Xinhua News Agency said China will seek to keep a “firm grip” on the real estate market to prevent a rebound in housing prices, intensifying concern an economic slowdown could reduce demand for raw materials.

An S&P 500 index of energy shares advanced 2.6 percent this week. Baker Hughes (BHI) jumped 16 percent to $45.59. The third- largest oilfield-services company reported per-share profit that beat analysts’ estimates by 30 percent, the most since at least 2001, data compiled by Bloomberg show.
IBM Climbs

Technology companies added 1.9 percent for the second- biggest increase among the 10 groups in the S&P 500. IBM climbed 3.5 percent to $192.45. The world’s biggest computer-services provider boosted its full-year earnings forecast after second- quarter profit beat analysts’ estimates, helped by a decade-long shift to higher-margin software sales.

EBay advanced 12 percent to $44.85 for the biggest gain since September. The world’s largest Internet marketplace reported sales and profit that topped analysts’ estimates as more U.S. consumers shopped for new items on the site.

SanDisk Corp. (SNDK) surged 16 percent, the most since April 2010, to $38.70. The maker of flash memory for mobile devices exceeded analysts’ per-share earnings estimate by 14 percent, the most in a year, according to data compiled by Bloomberg.

Google Inc. (GOOG) climbed 6 percent to $610.82. The owner of the world’s most popular search engine said second-quarter revenue surged 35 percent, helped by its acquisition of Motorola Mobility Holdings and as more users clicked on advertisements.
Intel, AMD

Intel Corp. added 1.1 percent to $25.52. The world’s largest semiconductor maker reported second-quarter profit that topped analysts’ estimates while scaling back its annual sales forecast. Advanced Micro Devices Inc. (AMD), a rival of Intel, tumbled 14 percent to $4.22 after predicting a revenue decline amid market-share losses and diminished demand for personal computers.

Walgreen Co. (WAG) surge 13 percent to $34.60 for the biggest rally since 2000. The largest U.S. drugstore chain renewed a contract to provide Express Scripts Inc. (ESRX) customers with prescriptions, ending a dispute that contributed to an 11 percent decline in the retailer’s quarterly profit.

Financial shares fell 2.4 percent as a group, the most in seven weeks. Wall Street’s five biggest banks reported the worst start to a year since 2008, with combined first-half revenue falling 4.5 percent to $161 billion, the lowest since $135 billion four years ago. The firms blamed the decline on low interest rates and a drop in trading and deal-making.
Headcount Cuts

Bank of America sank 9.6 percent to $7.07 for the biggest loss since November. The lender said demands for buybacks from mortgage-bond investors and insurers surged more than $6 billion in the second quarter to $22.7 billion. Record claims for refunds on faulty mortgages cast doubt on whether improvements in the lender’s real estate operations will last, according to Paul Miller, an analyst at FBR Capital Markets.

Morgan Stanley reported a 50 percent drop in earnings on the biggest decline in trading revenue among Wall Street firms and said it will cut headcount by 4,000 this year. The stock slumped 9 percent to $12.78 for the week.

Chipotle Mexican Grill Inc. (CMG) plunged 19 percent, the most since its 2006 initial public offering, to $316.98 after second- quarter sales trailed analysts’ estimates. Slower U.S. consumer spending hurt the chain’s sales with smaller gains as the year proceeded, Chief Financial Officer Jack Hartung said on an analyst call. Extreme weather may boost food costs later this year and next, Hartung said.

Looming ECB rate cuts drive Euribor rates to new lows

Euro zone bank-to-bank lending rates fell to new all-time lows on Friday, driven down by record low European Central Bank interest rates and the view it could take them even lower in the coming months.

The ECB's overnight deposit rate, which it cut to zero on July 5, acts as a floor for money market rates as banks only lend to rival banks if they are able to earn a better rate of interest than at the central bank.

The ECB hopes its unprecedented move, which means banks now get nothing if they park their spare cash there, will nurture a return of more significant interbank lending by forcing banks to look for more profitable options.

Although some money market experts fear the cut could backfire and kill off parts of the market, the move, plus a growing belief the ECB could continue to cut rates, has had an immediate impact on bank-to-bank rates.

Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.451 percent from 0.458 percent.

Other key rates saw similar drops. Six-month Euribor rates fell to 0.735 percent from 0.743 percent. Shorter-term one week rates dipped to 0.113 percent from 0.115 percent while overnight rates ticked up to 0.120 percent from 0.119 percent.

Euribor rates, like counterpart Libor bank-to-bank rates, are currently at the center of a manipulation scandal after it emerged a number of banks were falsely submitting the Libor rates they pay.

Dollar-priced three-month bank-to-bank Euribor lending rates fixed lower at 0.912 percent from 0.919 percent, while overnight dollar rates were more-or-less flat at 0.339 percent.

The ECB's move to stop paying interest on banks' deposits saw almost half a trillion euros transferred from the ECB's deposit facility to banks' current accounts last week.

But with the monthly reserves cycle now in its stride and fewer options available for banks to juggle their funding, the money has started to stabilize.

A total of 357 billion euros was parked in the ECB's deposit facility overnight. Banks' current account deposits at the ECB dipped to 489 billion euros.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 5 a.m. EDT.

Exact size of Spanish bank bailout seen in September: Eurogroup

The exact amount that Spain will borrow from the euro zone to recapitalize its banks will only be determined in September, euro zone finance ministers said on Friday, after approving the terms of a loan of up to 100 billion euros ($123 billion).

In return for the loan, Spain will have to restructure its banking sector and its assets, and improve governance and regulation, the Eurogroup of euro zone ministers said in a statement.

But Madrid will also have to honor its government deficit reduction targets and commitments on structural reforms and rebalancing of its economy, undertaken under separate procedures of the European Union.

"Progress in these areas will be closely and regularly reviewed in parallel with the financial sector conditionality," the Eurogroup statement said.

($1 = 0.8156 euros)

ECB's Coeure warns against betting on euro collapse

The euro zone political commitment to the euro should not be underestimated, European Central Bank Executive Board member Benoit Coeure said on Friday in a warning to those doubting the single currency's survival.

In a speech in Mexico City, Coeure said there was a lack of understanding about the euro zone's approach to tackling the debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," Coeure said.

"The ambition to provide long-term foundations for EMU in less than a decade is a historical step of great significance," he added.

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the ESM permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis".

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

Indebted Valencia asks Spain government for help, markets jolted

Spain's heavily indebted eastern region of Valencia said on Friday it would need financial help from Madrid, spooking financial markets and complicating central government efforts to stave off a full-blown sovereign bailout.

On a tumultuous afternoon, the government also cut its economic forecast for 2013, indicating the country would stay mired in recession well into next year after a contraction expected at 1.5 percent in 2012.

Valencia, Spain's most indebted region alongside its northern neighbor Catalonia, sought help under an 18-billion-euros ($22.1 billion) program passed on Thursday and aimed at helping the autonomous regions which, together with local authorities, account for around half of all public spending.

"Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis," the regional government said in a statement.

The program is funded by the Spanish Treasury but the regions keep full responsibility over the debt.

The troubled regions, as well as a banking sector beset by a burst property bubble, have pushed Spain's borrowing costs to record highs and pushed the country closer to requiring a full-scale bailout.

Euro zone finance ministers approved the terms of a loan of up to 100 billion euros ($123 billion) for Spain to recapitalize its banks on Friday. The exact size of the support will only be determined in September.

But the Valencia announcement sent the risk premium on Spanish government debt to a euro-era high on Friday as its borrowing costs climbed to a record 7.29 percent, a level considered unsustainable, with little relief likely soon.

The euro fell as low as $1.2175, just above a two-year low of $1.2162 hit last week, while U.S. and European stocks also slid.

Despite its downgraded GDP forecasts the government confirmed its deficit objectives for 2012 and 2013 but did not release the details on how the efforts would be split between the regions and the central government this year.

It will use the new forecasts as a base to draw up the 2013 budget, for which the ceiling has been set at 127 billion euros compared to 119 billion euros in 2012.

FUNDING PRESSURE

Spain's regions, currently shut out of international debt markets, have been pushing for months for a financing mechanism to help them meet their financial obligations.

Jose Ciscar, the deputy regional head who made public Valencia's request, said it would now be in position to meet its financial obligations.

"This liquidity fund thus brings confidence," he said.

Valencia, which already used several government credit lines in the first half of the year to meet debt repayments, still needs to repay 2.85 billion euros by the end of the year.

Treasury Minister Cristobal Montoro said after a weekly cabinet meeting that the regional funding plan carried strict fiscal conditions that beneficiaries must meet while providing regular updates on its finances.

"The Valencian government will have an obligation to meet new conditions to gain access to this liquidity," he said, after first showing his surprise when asked about the request.

Montoro also announced that the costs of funding the country's debt were set to rise by 9.1 billion euros in 2013.

Spain, which on Thursday adopted most of the measures of a new package of spending cuts and tax hikes worth 65 billion euros, will next tap the markets next Tuesday when it sells three- and six-month bills. It will also sell three- to five-year bonds on August 2.

Several Spanish regions - some of them governed by the ruling People's Party - have rebelled against the latest cuts.

Catalonia, the Basques and Andalucia have also said they would not implement all the cuts because it would end up killing the public education and health systems they control.

Analysts believe most of the autonomous regions will miss their deficit target of 1.5 percent of the economic output this year.

The government last week asked at least eight of the 17 to revise their budget plans for 2012 to meet tough deficit goals and is now threatening a handful of them to take over their finances.

There are signs of growing discontent at the economic pain being heaped on the Spanish public. Hundreds of thousands of Spaniards marched against the centre-right government's latest measures on Thursday evening, following more than a week of demonstrations across the country.

Spain has raised 69 percent of its original medium- and long-term debt target of 85 billion euros for the year.

But the new deficit goals and the burden from the regions is expected to increase it by around 20 billion euros, putting more pressure on the country's credit rating which is already just one step away from junk territory.

($1 = 0.8156 euros)