NASDAQ: $40M in compensation for Facebook IPO glitches

Steven Loeb · June 6, 2012 · Short URL:

Proposed amount already being criticized by rivals, investors

The Facebook IPO has been a disappointment and a disaster since its debut in May. The problems surrounding the stock have resulted in numerous lawsuits and investigations. Now, at least one party involved is attempting to do something to make it right, though other parties are already expressing their displeasure.

NASDAQ OMX will be paying out $40 million to clients who lost money after NASDAQ’s mishandling of the Facebook IPO on May 18, officials announced Wednesday.

The money stems from problems caused by a large number of order cancellations, which overwhelmed the system. This caused a 30-minute delay in delivering the opening price. The vast number of cancellations also caused Nasdaq to have to delay delivering order messages to investors for hours. Some did not know whether or not their orders went through for six hours.

Some $13.7 million will be paid in cash to those firms, while the rest of the money will “be credited to members to reduce trading costs, with all benefits expected to be achieved within six months for the vast majority of firms.”

The firms that will receive compensation will be those that were harmed by technical glitches prior to the 11:30 stock opening, and those that were uncertain of whether or not they owned the stock due to the backlog.

Originally NASDAQ had announced that it would be spending $13 million to make up for the glitches, $10 million coming directly from money made by Nasdaq from buying and selling the Facebook shares. That is still the plan, but the Group Board has added the extra money after consideration. It now includes $7 million in estimated revenues from Facebook stock over the next five years.

Given that loses due to technical glitches were estimated to be at least $100 million, the initial $13 million proposal was not received well by those investors. And neither is the new number that NASDAQ announced today.

Knight Capital, an investor that reportedly lost up to $35 on the Facebook IPO, was unhappy with the amount NASDAQ is willing to reimburse them.

"Clearly, we are disappointed that Nasdaq's compensation fund does not come close to covering reported losses from broker-dealers like Knight who traded Facebook shares on behalf of average investors the day of the IPO, and who suffered losses as a result of Nasdaq's failures in connection with this IPO,” Knight Capital is quoted as saying.

NYSE Euronext also released a statement today, accusing NASDAQ of playing unfairly.

“We have yet to receive full details of NASDAQ’s plan. However, we believe it would be wholly inconsistent with fair practice and an undue burden on competition to allow NASDAQ to use pricing and other machinations as a guise for fairly compensating those impacted by the Facebook IPO issues.”  

“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.”

Under normal rules, NASDAQ would only be allowed to pay out $3 million in damages, so the Securities and Exchange Commission still must approve the proposal.

Facebook's stock was up over 3.5% on Wednesday, ending at $26.81 for the day. The stock is still over $10 down from its IPO price of $38.

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